|July 10, 2009|
Treasury Department Releases Guidance for Grant Program
|On July 9, 2009, the Treasury Department released guidance and application materials for the cash-grant program enacted in Section 1603 of the American Recovery and Reinvestment Act of 2009, P.L. 111-5. The following link can be used to access the guidance ("Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009") and the application (including Terms and Conditions): http://www.treas.gov/recovery/1603.shtml. The Treasury expects that its electronic portal to accept grant applications will be available on August 1, 2009.|
The grant program allows owners and certain lessees of specific types of renewable energy property to receive a cash grant of, generally, 30 percent of the cost of the property in lieu of claiming a tax credit [either the Production Tax Credit (PTC) or the Investment Tax Credit (ITC)] with respect to the property. The grant program was enacted in response to the declining pool of investors with sufficient tax liability to currently utilize the ITC or PTC, and in many ways functions as a surrogate for those credits; for example, grants are not taxable income and the basis of the property with respect to which a grant was paid generally must be reduced by 50 percent of the grant. The grant is available for property placed in service in 2009 or 2010, or placed in service after 2010 (and before the expiration date of the credit available for the property) so long as construction of the property began in 2009 or 2010. The grant is 30 percent for wind, biomass, geothermal, landfill gas, municipal solid waste, certain hydroelectric, and marine kinetic facilities, or qualified fuel-cell property, solar property, and qualified small wind energy property; and 10 percent for qualified microturbine property, combined heat-and-power-system property, and geothermal heat-pump property. The program requires grants to be paid within 60 days of the date the property is placed in service or the date the grant application is completed, whichever is later.
The guidance includes a discussion of the application process; the eligibility requirements for applicants; property and payment eligibility; eligible basis; how the grant applies to leased property; recapture rules; and miscellaneous provisions.
Eligible Applicants. Section 1603(g) provides that the following entities are not eligible for grants: any federal, state, or local government (including any political subdivision, agency, or instrumentality thereof); any organization described in Section 501(c) of the Internal Revenue Code (the Code) that is tax-exempt under Section 501(a) of the Code; any entity referred to in Section 54(j)(4) of the Code (e.g., a Clean Renewable Energy Bond lender, a cooperative electrical company, or any governmental body); and any partnership (or other "pass-thru entity") that has an ineligible person as a partner or owner. (For purposes of eligibility, a Real Estate Investment Trust is not a pass-thru entity, although the amount of the grant may be limited.) The guidance confirms that a "blocker corporation" can be used by an ineligible person to hold an interest in a partnership or pass-thru entity without causing the partnership or pass-thru entity to be ineligible for the grant. An applicant must be either the owner or the lessee of the property and must have originally placed it in service.
Property and Payment Eligibility. As noted above, qualified property must be originally placed in service in 2009 or 2010 or placed in service after 2010 and before the relevant credit termination date if construction of the property begins between January 1, 2009, and December 31, 2010. Qualified property may include expansion of an existing property that was placed in service before 2009. Applicants must submit certain supporting documentation listed in the guidance demonstrating that property is eligible property and that it has been placed in service (and if placed in service after December 31, 2010, that construction began in 2009 or 2010). Only "specified energy property" qualifies for a grant---that is, only tangible personal property (not including a building) or certain other tangible property that is both used as an "integral part" of the activity performed by a qualified facility and located at the site of the qualified facility.
Specified energy property, within the meaning of Section 1603, consists of two broad categories of property: certain property described in Section 45 of the Code (wind, biomass, geothermal, landfill gas, municipal solid waste, qualified hydropower, marine and hydrokinetic facilities) and certain property described in Section 48 of the Code (solar, geothermal, qualified fuel cell, qualified microturbine, combined heat-and-power system, qualified small wind energy, and geothermal heat-pump properties). The guidance provides descriptions of each of the various types of property that are specified energy property within the meaning of Section 1603. Property which is used predominantly outside the United States does not qualify for the grant program. In addition, the original use of the property generally must begin with the applicant, although a facility may contain used parts if the cost of those used parts does not exceed 20 percent of the facility's total cost.
If property will be placed in service after 2010, it is key that the applicant establish that construction of such property began during 2009 or 2010. According to the guidance, construction of property begins when physical work of a significant nature begins. The guidance provides rules for self-constructed property and for property constructed by others, as well as a safe harbor to provide some certainty as to when construction begins in either situation.
For an applicant that manufactures, constructs, or produces property for use in the applicant's trade or business (or for its production of income), construction begins when physical work of a significant nature begins and does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. For example, construction on a wind turbine begins when work begins on excavating for the foundation, setting anchor bolts into the ground, or pouring concrete pads, but does not begin with preliminary activities, such as clearing the land or excavating to change the contours of the land.
For property manufactured, constructed, or produced for the applicant by another person under a written binding contract entered into before the manufacture, construction, or production of the property for use by the applicant in its trade or business (or for its production of income), construction begins when physical work of a significant nature begins under the contract. The guidance contains a number of rules regarding whether a contract is "binding."
Under the safe harbor, an applicant may treat physical work of a significant nature as beginning when the applicant incurs (in the case of an accrual-basis applicant) or pays (in the case of a cash-basis applicant) more than 5 percent of the total cost of the property (excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching). When the property is being manufactured, constructed, or produced by another person, the applicant (not the counterparty) must meet the safe harbor.
For purposes of determining the beginning of construction of property or the date property is placed in service, all components of a larger property are a single unit of property if the components are functionally interdependent. On a wind farm, for example, each wind turbine, its tower, and its supporting pad are a single unit of property. The guidance allows the owner of multiple units of property that are located on the same site and will be operated as a larger unit to elect to treat the units (and any property, such as a computer control system, that serves some or all such units) as a single unit of property to determine both the beginning of construction and the date the property is placed in service. This election could be quite favorable when some, but not all, of a planned facility will be placed in service by the end of 2010. For example, the owner of a wind farm could elect to treat all qualifying property at the site as a single unit to determine when construction began and when the property is placed in service (property placed in service before 2009 cannot be included, however). If this election is made, the failure to complete the entire wind farm by the credit termination date won't preclude receipt of a grant; the cost of turbines and other qualifying property placed in service before the credit termination date would remain eligible for a grant.
Eligible Basis. The cost of property eligible for a grant is determined in accordance with the general rules for determining the basis of property for federal income tax purposes. Thus, eligible cost will include all expenditures that make up the initial cost basis of property under Section 1012 of the Code. Eligible costs would include installation costs and the cost for freight incurred in construction of the specified energy property, but would not include costs that will be deducted for federal income tax purposes in the year in which they are paid or incurred. For example, if the applicant claims a deduction under Section 179 for all or part of the cost of property, those costs are not eligible for the grant. For geothermal property, if an applicant currently deducts intangible drilling and development expenses, those costs generally would not be eligible for the grant in a later year when the property is placed in service. If a facility is used to generate energy that qualifies for the grant and energy that would not qualify for the grant [e.g., a biomass facility that burns fuel not only from open-loop or closed-loop biomass (qualifying activity) but also from natural gas (a non-qualifying activity)], only a portion of the cost of the facility would qualify for the grant, based on the amount of electricity generated from each source.
Not surprisingly, a grant applicant must submit documentation to support the cost basis claimed for the property. Supporting documentation includes a detailed breakdown of all costs included in the basis. Other supporting documentation, such as contracts, copies of invoices, and proof of payment, must be retained by the applicant and made available to the Department of Treasury upon request. For applicants claiming a grant for cost basis in excess of $500,000, the request must include an independent accountant's certification "attesting to the accuracy of all costs claimed as part of the basis of the property." While the record-retention requirement is no different from that which a taxpayer would encounter to claim the ITC, the accountant certification is not analogous to anything required to claim the credit unless the standard for preparing the certification is similar to the standard for signing a tax return claiming the credit.
Leased Property. The guidance allows the grant to be claimed by a lessee of property in two situations. First, a lessor who is eligible to receive a grant with respect to leased property may elect to pass through the grant to the lessee. This election only may be made with respect to property that would be eligible for the grant if owned by the lessee. If the election is made, the grant would be based on the property's "independently assessed" fair market value on the date the property is transferred to the lessee. If the grant is passed through to the lessee, the basis of the property is not reduced, but the lessee must agree to include ratably in its income over the five-year recapture period an amount equal to 50 percent of the grant.
Second, a lessee in a sale-leaseback transaction may claim the grant if three conditions are satisfied: (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 three months after it was originally placed in service; and (iii) the lessee and lessor must not make an election to preclude application of the sale-leaseback rules Recapture. Similar to the ITC, the grant effectively vests over five years. That is, if an applicant disposes of the qualified property to a disqualified person or the property ceases to qualify as specified energy property within five years from the date the property is placed in service, the grant must be repaid as follows: 100 percent if the recapture event happens within a year of placing the property in service, declining at 20 percent annually over the five-year period (e.g., 80 percent in Year 2, 60 percent in Year 3, 40 percent in Year 4, and 20 percent in Year 5).
Property is treated as disposed of to a disqualified person if any interest in the property (or in the applicant or any partnership or pass-thru entity that is a direct or indirect owner of an interest in the applicant) is sold to a person who would have not been eligible to apply for the grant. (This is a more favorable recapture provision than that for the ITC, which generally is subject to recapture if the property is disposed of within five years of the placed-in-service date regardless of the status of the person acquiring the property). However, the applicant remains jointly liable with the transferee of the property (who must agree to be subject to the Section 1603 recapture provisions), even if the applicant has no continuing control over the property's operation. Similarly, if a lessor elects to pass through the grant to a lessee (as described in Section 4 above) and sells the property to a disqualified person, the lessee is liable to the Treasury for the recapture amount even if the lessee maintains control over the property. As noted below, an applicant may assign its right to receive the grant to another person (e.g., an equity investor or developer) so long as the assignee satisfies certain registration requirements. The guidance does not specifically address whether the assignee would be jointly liable with the applicant to repay all or a portion of the grant if a recapture event occurs, though it would be surprising if the Treasury does not require the assignee to be liable (in the same manner as an assignee or buyer of the specified energy property would be liable).
Property ceases to qualify as a specified energy property if its use changes so that it no longer qualifies as specified energy property (e.g., the property is used outside the United States during the recapture period). Recapture generally is not required if the property temporarily ceases to produce energy so long as the applicant intends to resume production. Thus, if an off-taker fails to make payments required under a power purchase agreement, an applicant generally may temporarily shut down the system without concern over recapture.
Applicants are not required to post a bond as a condition of receiving a cash grant, and no lien on the property is created in favor of the United States. However, grants that must be repaid to the Treasury under these rules are considered debts owed to the United States, and if not paid when due, will be collected by all available means against any assets of the applicant, including enforcement by the U.S. Department of Justice. Debts arising under the grant program are not considered tax liabilities.
Miscellaneous Provisions. Applicants may submit, along with their request for payment, a Notice of Assignment, assigning the payment to a third party (such as an equity investor). The Notice of Assignment will include the third party's Dun & Bradstreet Data Universal Numbering System (DUNS) number. The assignee will be required to register with the Central Contractor Registration at the website address provided below. The guidance confirms that receipt of a grant does not subject the property to the requirements of the National Environmental Protection Act (or similar laws) or the requirement of the Davis-Bacon Act. Except as described in Section 4 above, grants are not includible in the gross income of the applicant (although an amount equal to 50 percent of the payment reduces the basis of the property, for purposes of depreciation and the recognition of gain or loss).
The application is comprised of two parts: a six-page application form and the signed Terms and Conditions. The application has separate sections for applicant eligibility (type of applicant); general information about the property; general information about the applicant; detailed information about the property (including a narrative description of the property and the estimated number of jobs created by the property, not including jobs created by suppliers or manufacturers of the property); the cost basis of the property and the applicable percentage of the grant (30 percent or 10 percent); and required documentation. Note that job creation and retention is not a condition to receive a grant; the Treasury appears to be requesting this information to help assess the efficacy of the grant program in job creation and retention.
Applicants who place qualified property in service during 2009 or 2010 must submit the application form and Terms and Conditions after the property has been placed in service. Applicants who began construction of qualified property in 2009 or 2010 and have not placed the property in service by the date of the application should submit only the application before October 1, 2011, to demonstrate that construction began during 2009 or 2010; after the qualified property is placed in service, an updated application form and the Terms and Conditions should be submitted. Applications will be reviewed by the Treasury Department with assistance from renewable energy experts in the Department of Energy.
The application form requests identifying information for the applicant, including its DUNS number. Applicants also must register with the Central Contractor Registration before payment can be made. Grants will be paid electronically within five days from the date the Treasury notifies the applicant that the application has been approved. Applicants that don't have a DUNS number can obtain one free by calling 1-866-705-5711; applicants can register with the Central Contractor Registration at www.ccr.gov/startregistration.aspx. These preliminary steps should be completed before submitting an application.
All applications must be received before October 1, 2011.