On July 9, 2009, the Treasury Department issued widely anticipated guidance regarding the application process and eligibility criteria for cash grants available in lieu of income tax credits for certain types of renewable energy projects. The guidance includes a sample application form, but states that applications will not be accepted until August 1, 2009.
On February 16, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the Act). Under the Act, taxpayers may elect to receive cash grants in lieu of taking the investment tax credit (ITC) under Section 48 of the Internal Revenue Code of 1986, as amended (the Code) or the production tax credit (PTC) under Section 45 of the Code. The grants are intended to temporarily fill the gap created by reduced investor demand for tax credits under current economic conditions.
In order to qualify for the grant, a taxpayer must place “specified energy property” in service in 2009 or 2010, or after 2010 if construction begins in 2009 or 2010 provided such property is placed in service by the end of 2012 (for wind), 2013 (for closed- and open-loop biomass, geothermal, landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic facilities), or 2016 (for solar). The amount of the grant will generally be 10 or 30 percent of the basis of the property depending on the type of property placed in service.
The Treasury Guidance
For property placed in service in 2009 or 2010, applications must be submitted after the property has been placed in service and before October 1, 2011. Treasury will make payment to qualified applicants within 60 days from the date the application is received. If an applicant has not submitted sufficient information upon which Treasury can make a determination, the applicant will be given 21 days from the date of notice of such deficiency to submit additional information.
For property not placed in service in 2009 or 2010 but for which construction began in 2009 or 2010, applications must be submitted after construction commences but before October 1, 2011. Treasury will review such applications and notify the applicant if all eligibility requirements that can be determined prior to the property being placed in service have been met. Applicants must then submit within 90 days after the date the property is placed in service sufficient information for Treasury to make a final determination. Treasury will then conduct a final review and make payment within 60 days to qualified applicants.
When Treasury determines that an application is approved, it will send a notice to the applicant and payment will be made no later than five days from the date of such notice by electronic funds transfer.
Certain types of entities are not eligible to receive the grants: Any federal, state, local, or tribal government entity, tax-exempt entity, cooperative electrical company, clean renewable energy bond lender, or any partnership or other pass-through entity of which one of the above entities is a direct or indirect partner. Real estate investment trusts and cooperatives are not considered passthrough entities for this purpose. However, a pass-through entity may be eligible even though an ineligible shareholder has an indirect interest in the entity provided that a taxable C corporation is interposed between the ineligible shareholder and the pass-through entity. Thus, “blocker” corporations can be used where ineligible entities are participating in project ownership.
A foreign person or entity may be eligible for the grant if the person or entity qualifies for the exception provided in Code Section 168(h)(2)(B), i.e., generally when more than 50 percent of the gross income generated by the property is subject to U.S. federal income tax.
Placed in Service. Specified energy property must be originally placed in service in 2009 or 2010, or placed in service after 2010 and before the applicable credit termination date if construction of the property begins in 2009 or 2010.
Beginning of Construction. Construction is generally considered to begin when “physical work of a significant nature begins.” Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. The guidance provides as an example that in the case of a facility for the production of electricity from a wind turbine, construction begins when physical work begins on the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation. Preliminary work such as site clearing, test drilling, or excavation to change the contour of the land (as distinguished from excavation for footings and foundations) does not constitute the beginning of construction.
For property constructed for the applicant by another person under a written binding contract, construction begins when physical work of a significant nature begins under the contract. A contract is binding only if it is enforceable under State law against the applicant or a predecessor, and does not limit damages to a specified amount (e.g., by use of a liquidated damages provision). A contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions or any term is governed by a standard beyond the control of either party. A contract that imposes significant obligations on the applicant will be treated as binding notwithstanding the fact that certain terms of the contract remain to be negotiated. However, option contracts are not considered binding contracts, nor are supply, or similar, agreements that do not include the amount and design specifications of the property to be purchased.
The guidance provides a safe harbor allowing applicants to treat physical work of a significant nature as beginning when the applicant incurs or pays more than 5 percent of the total cost of the property (excluding the cost of any land and the preliminary activities previously mentioned).
Units of Property. For purposes of determining the beginning of construction or the placed in service date, all the components of a larger property are a single unit of property if the components are functionally interdependent. The guidance provides as an example that on a wind farm, each electricity-generating wind turbine, its tower, and its supporting pad are the single unit of property. The owner of multiple units of property that are located at the same site and that will be operated as a larger unit (e.g., a wind farm consisting of 50 wind turbines and related control systems) may elect to treat the units as a single unit of property for purposes of determining the beginning of construction and the date the property is placed in service. For purposes of the 5 percent safe harbor described above, the entire cost of such combined unit is taken into account. In cases where multiple units of property are treated as a single unit, failure to complete the entire planned unit will not preclude receipt of a grant, so that if in the above example only 40 of the planned 50 wind turbines are placed in service by the end of 2012, an applicant would be eligible for a grant payment based on the 40 turbines placed in service.
Original Use. The original use of the property must begin with the applicant. The guidance adopts a rule previously applied in other contexts that if the cost of the used parts contained within a facility is not more than 20 percent of the total cost of the facility, the applicant will not fail to be considered the original user of the property. Additionally, if new property is originally placed in service by a person and is sold to an applicant and leased back to the person by the applicant within 3 months after the date the property was originally placed in service, unless the lessee and lessor elect otherwise, the applicant-lessor is considered the original user of the property and the property is considered to be placed in service not earlier than when it is used under the leaseback.
Required Documentation. Applicants must submit supporting documentation demonstrating that the property is eligible property and that it has been placed in service, or if placed in service after 2010, that construction began in 2009 or 2010. Required documentation includes, but is not limited to: final engineering design plans stamped by a licensed professional engineer; a commissioning report that certifies that the equipment has been installed, tested, and is ready and capable of being used for its intended purpose; for properties that are interconnected with a utility, the interconnection agreement; for properties that are under construction but not yet placed in service, paid invoices and/or other financial documents demonstrating that physical work of a significant nature has begun on the property; and for leased property, the written agreement with the lessor.
Types of Property. Specified energy property includes only tangible property (not including a building) that is an integral part of a qualified facility and for which depreciation or amortization in lieu of depreciation is allowable. The guidance provides that property is an integral part of a qualified facility if the property is used directly in the qualified facility, is essential to the completeness of the activity performed in that facility, and is located at the site of the qualified facility. Only the portion of a facility that is specified energy property, along with the cost of installing it, will be taken into account in computing the grant payment. For example, in the case of a building with solar property on its roof, only the cost of the solar property qualifies for the grant; the cost of the building does not qualify. Property which is used predominantly outside the United States (i.e., located outside of the United States during more than 50 percent of the year) does not qualify for the grant. The guidance provides additional clarification for each type of qualifying facility as to the portions that will qualify as specified energy property.
The basis of the property is determined in accordance with the general rules for determining the basis of property for federal income tax purposes. For properties that have a cost basis in excess of $500,000 applicants must submit an independent accountant’s certification attesting to the accuracy of all costs claimed as part of the basis of the property.
A lessor may make an irrevocable election by written agreement to allow the lessee of the property to receive the grant, resulting in the lessee being treated as having acquired the property for its independently assessed fair market value on the date the property is transferred to the lessee, and generally following the applicable ITC rules governing elections to allow lessees to receive the credit. Under the election (i) the lessor must agree to waive all rights to a grant, PTC, or ITC with respect to the property; (ii) the lessee must agree to ratably include in gross income over the 5 year recapture period an amount equal to 50 percent of the grant payment; (iii) the lessor and lessee must both be persons eligible to receive a grant payment; and (iv) the lessor cannot be a mutual savings bank or similar financial organization, a regulated investment company, or a real estate investment trust.
In addition, in the case of a sale-leaseback transaction: (i) the lessee must be the person who originally placed the property in service; (ii) the property must be sold and leased back by the lessee, or must be leased to the lessee, within 3 months after the date the property was originally placed in service; and (iii) the lessee and lessor must not make an election to preclude application of the sale-leaseback rules.
If the applicant disposes of the property, or any interest in the property or the applicant, to a disqualified person, or the property ceases to qualify as specified energy property within 5 years from the date the property is placed in service, some or all of the grant must be repaid to the Treasury. The amount subject to repayment is 100 percent if the disqualifying event occurs in the first year and decreases by 20 percent for each year thereafter.
A disqualified person generally includes a person who would not be eligible to receive the grant if that person had placed the property in service. In contrast to the ITC rules, selling or otherwise disposing of the property to an entity other than a disqualified person does not result in recapture provided the property continues to qualify as specified energy property and provided the purchaser of the property agrees to be jointly liable with the applicant for any recapture.
Where a lessor elects to pass the grant payment to a lessee, and the lessor subsequently sells the property to a disqualified person, the lessee is liable for the recapture amount even if the lessee maintains control over the property. The guidance provides that applicants are not required to post a bond as a condition of receiving a grant payment, and receipt of a grant payment does not create a lien on the property in favor of the United States.
The guidance further provides that: (i) applicants may assign the grant payment to a third party; (ii) grant payments do not make the property subject to NEPA and similar laws; (iii) grant payments does not make the property subject to the requirements of the Davis-Bacon Act; (iv) grant payments are not includible in the gross income of the applicant but the basis of the property is reduced by 50 percent of the payment; (v) in the case of utilities, grant payments must be normalized; (vi) real estate investment trusts are eligible to receive grant payments to the extent allowed by Code Section 50; and (vii) applicants will be required to provide reports, as required by Treasury, including an annual performance report.