Yesterday the Treasury Department released guidance and applications procedures for its new investment tax credit grant program enabled by the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”). The grant program will permit certain owners of renewable energy generation assets to exchange the nonrefundable federal income tax credits to which they would otherwise be entitled for cash payments from Treasury. The program guidance and application forms have been anxiously anticipated since passage of the Recovery Act in February.
This advisory describes key features of the grant program as announced yesterday.
Federal tax law encourages the generation of electricity from renewable energy resources by offering accelerated depreciation deductions and nonrefundable income tax credits to business taxpayers that are owners of renewable energy generation facilities. There are two different federal tax credits in play: the investment tax credit (ITC), which, prior to the Recovery Act, was principally available to businesses owning solar energy assets, and the production tax credit (PTC), which can be claimed by qualifying owners of certain other types of renewable energy generation facilities (e.g., wind, biomass, landfill gas assets).
The Recovery Act allows taxpayers to elect to claim the ITC—generally equal to 30 percent of qualifying project costs—in lieu of the PTC for projects placed in service through 2012. The Recovery Act further allows a taxpayer to elect to claim the face value of its ITCs in cash, rather than claiming the credits on an income tax return, with respect to qualifying renewable energy projects that are placed in service in 2009 or 2010 (or, in some cases, placed in service after 2010, as long as construction begins on the project by December 31, 2010).1
The ITC grant program effectively converts the renewable energy PTCs and ITCs into immediately refundable business tax credits with respect to projects reaching commercial operation in 2009 or 2010. Although the Recovery Act authorized the ITC grant program in mid-February, application to Treasury for cash payments could not be made until the department created a process and application forms for the grant program. Thus, owners of qualifying renewable energy generation assets that placed those assets into service during the first half of this year have not yet been able to apply for and receive the grant funds.
ITC Grant Application Guidance
Treasury issued three documents yesterday that enable the ITC grant program: (i) program guidance on payments for specified energy property in lieu of tax credits under the Recovery Act, (ii) terms and conditions to which a grant applicant must agree and (iii) a six-page grant application form. Together, these documents make clear the following key rules applicable to the grant program:
Application & Payment. The grant application form and supporting documentation may be submitted for a project after the project is placed into service (for projects going into service in 2009 or 2010). Applicants may apply online at www.treasury.gov/recovery. Treasury will issue payment of the grant within 60 days after a completed application is received. If an applicant failed to submit all required information with the application, Treasury will notify the applicant and request that additional information be submitted; failure of the applicant to respond within 21 days of this notice will result in denial of the application.
Documentation Required. The applicant must submit certain documentation with its grant application. At a minimum, the applicant must submit design plans; final engineering design documents stamped by a licensed professional engineer; a commissioning report provided by the project engineer, equipment vendor or an independent third party; an interconnection agreement if the project will be connected to the grid; a detailed breakdown of costs of the project; and an independent accountant’s certification if the project’s cost basis is over $500,000. Certain additional documentation requirements are provided in the guidance by renewable energy resource type.
Grant Recapture. The grant, like the ITC, can be recaptured (in whole or in part) due to certain events occurring during the five-year period after the renewable energy project is placed in service. The grant (like the ITC) will be recaptured if the project permanently ceases operations during that five-year period. However, contrary to the usual ITC rule, the grant will not be recaptured by the grantee if the grantee sells the project to a transferee that would have been a qualified grant applicant—i.e., a U.S. taxpaying entity that is not a government or nonprofit organization, and is also not a partnership or other flow-through entity with a direct or indirect partner that is a government, nonprofit organization or non-U.S. taxpayer. (Yes, a blocker corporation works: a grantee or project transferee that is a flow-through entity is not disqualified if it has a non-taxpayer as an indirect owner, as long as a corporation is interposed between the non-taxpayer and the grantee or transferee.) In the case of transfers of property to qualified transferees, the transferee must agree to share joint liability with the grant applicant for any future recapture liability. Finally, the grant will not be recaptured if the project ceases to generate electricity temporarily, “provided the owner of the property intends to resume production at the time production ceases.”
Lessees. The grant may be claimed by lessees of qualifying projects, as long as the lessor was itself eligible for the grant, but agrees not to claim either the grant or the tax credits. The Treasury guidance also makes clear that the so-called “90-day rule” applicable in the sale/leaseback context will continue to apply in this grant context, such that a lessee will remain a qualified applicant for the ITC grant where the lessee and lessor enter into a sale and lease arrangement within three months of the day on which the project originally went into operation. A grant paid to a lessee will be recaptured, however, if the lessor transfers the project to a nonqualified owner during the five-year grant recapture period. The lessee is also liable for grant recapture if the lease terminates, and use of the property changes such that it is no longer eligible property.
Unit of Property. Under the Recovery Act, it was not clear what was the relevant unit of property with respect to which a grant application could be made. For example, while the IRS considers each wind turbine (together with its tower and supporting pad) to be a separate wind “facility” that may claim PTCs, it was not clear whether each wind turbine would be analyzed as separate grant-eligible property under this program. Recent Treasury guidance states that the components of a larger property are a single unit of property for grant purposes “if the components are functionally interdependent,” and confirms that each wind turbine is a separate unit of property. However, for grant compliance and application purposes, the applicant can generally choose to treat multiple units as a single unit if they are “located at the same site and . . . will be operated as a larger unit.”
Physical Construction. Under the Recovery Act, the grant is available to owners of qualifying projects that place projects into service during 2009 or 2010, or place projects into service after 2010 (and before the expiration of the current tax credit availability period for the particular type of project), as long as construction on the project began before the end of 2010. Treasury has issued guidance on when construction is considered to have begun on a project, so that taxpayers can determine whether a project that is not yet placed into service by December 31, 2010, will nevertheless qualify for the grant. The rules on when construction is deemed to begin parallel in many respects the standards under the bonus depreciation rules, differentiating self-constructed property from acquired property and looking to when “physical work of a significant nature” begins at the site. The guidance also provides a safe harbor based on costs incurred or spent as of a certain date: an applicant can treat construction as having begun on the date by which the applicant has incurred or spent (depending on its accounting method) more than five percent of the total cost of the property.
Grant Nontaxable. The ITC grant is nontaxable for federal tax purposes. However, one half of the ITC to which the applicant would have otherwise been entitled will decrease the applicant’s depreciation basis in project assets.
Repayment & Applicant Error. The guidance states that funds that must be repaid under the grant program are not considered tax liabilities, but are debts owed to the United States. If this debt is not “paid when due,” it will be “collected by all available means against any assets of the applicant,” including through enforcement by the Department of Justice. The applicant is required to inform Treasury as soon as the applicant determines that it provided any information in the grant process that was “materially inaccurate or incorrect,” and, if Treasury determines that this inaccuracy disqualifies the application, then the applicant must “immediately return the funds to Treasury.” There are no provisions addressing nonmaterial inaccuracies or detailing applicable penalties.
The glass is clearly half full. Although the grant rules will pose some challenges—for example, the documentation requirements will prove burdensome for some projects and lessees may face hurdles in managing recapture risk—overall the grant guidance appears consistent with the spirit of the enabling legislation. The ITC grant program, like many aspects of the Recovery Act, was intended to help fill the current gap in available project financing and stimulate economic growth. The guidance reads like many other grant announcements—with a focus on incentivizing action rather than curbing abuse —and, noticeably unlike most tax law, is almost devoid of both painful definitional hair-splitting and lengthy discussions of penalties or other difficult consequences sure to result from applicant error.
The recently issued guidance does not address some of the more complex tax questions, particularly those relating to grants claimed in the partnership or cross-border context, that have arisen in connection with the ITC grant program. It is anticipated that Treasury will issue a second round of guidance, perhaps within the next six months, that will address some of these important issues likely to impact structures for the development and financing of renewable energy projects.