Tax and Energy & Utilities Alert
July 2009
Authors:
Charles H. Purcell
charles.purcell@klgates.com
206.370.8369
Eric E. Freedman
Tax Incentives for Renewable Energy:
Treasury Department Issues Guidance on
Eligibility Requirements for Grants in Lieu of
Tax Credits for Specified Energy Property
eric.freedman@klgates.com
206.370.7627
Dirk Michels
dirk.michels@klgates.com
650.798.6709
Darcie L. Christopher
darcie.christopher@klgates.com
206.370.8173
K&L Gates is a global law firm with
lawyers in 33 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
On July 9, 2009, the Department of the Treasury (“Treasury”) issued detailed
guidance (the “Guidance”) on the alternative energy grant program that was created
by Section 1603 of the American Recovery and Reinvestment Act of 2009 (the
“2009 Recovery Act”), which was signed by President Obama on February 17, 2009.
Under the grant program, taxpayers may, in lieu of claiming any available federal
investment tax credit or production tax credit, apply to the Secretary of the Treasury
for a cash grant payable when “specified energy property” is placed in service.
Generally, the term “specified energy property” includes wind facilities, closed- and
open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash
facilities, certain hydropower facilities, marine and hydrokinetic renewable energy
facilities, solar energy property, geothermal energy property, qualified fuel cell
property, qualified microturbine property, combined heat and power system property,
and geothermal heat pump property. The grant reimburses the taxpayer for a portion
-- from 10% to 30% -- of the cost of such facilities. Although Treasury officials
expect to make grants totaling approximately $3 billion under the grant program,
Treasury is not limited in the amount of grants it may disburse to qualified
applicants.
This alert summarizes the information included in the Guidance and describes
generally the requirements for receiving a grant under the program. A full copy of
the Guidance can be found at http://www.treasury.gov/recovery/docs/guidance.pdf.
Overview of the Guidance – Key Points
The Guidance generally provides a description of the requirements for receiving a
Section 1603 grant. Many of these requirements are consistent with the requirements
for claiming the investment tax credit or the production tax credit. The Guidance
does, however, differ in some instances from the general rules applicable to the
investment tax credit and the production tax credit. These differences include:
•
Extension of Benefits to Entities Held by Foreign Investors and TaxExempt Organizations. The Guidance clarifies that tax-exempt
organizations and foreign persons that would not otherwise qualify as
persons eligible to receive a Section 1603 grant may invest in a partnership
or other pass-thru entity through domestic “blocker” corporations without
disqualifying the pass-thru entity as an entity eligible to receive a Section
1603 grant.
Tax and Energy & Utilities Alert
•
•
•
Safe Harbor for Eligibility of Facilities
Under Construction. Generally, in order to
qualify for a Section 1603 grant, property
must be (i) originally placed in service
between January 1, 2009 and December 31,
2010, regardless of when construction
begins, or (ii) placed in service after 2010
and before the applicable credit termination
date (discussed below) if construction of the
property begins between January 1, 2009
and December 31, 2010. In determining
whether construction has begun, the
Guidance provides a safe harbor for
applicants such that construction is treated
as beginning when the applicant incurs or
pays more than 5% of the total cost of the
property.
Clarification of Substantiation
Requirements. The Guidance provides that
applicants must submit with their Section
1603 grant applications documentation
supporting the cost basis claimed for the
property, including a detailed breakdown of
all costs included in the basis. Additional
documentation, such as contracts, invoices,
and proof of payment, must be retained and
made available to Treasury upon request.
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.
Limitation on Recapture of Grants.
Under the general rules applicable to the
investment tax credit, if energy property is
sold within a specified period of time
following the date on which it is placed in
service, the taxpayer claiming the tax credit
may be subject to recapture regardless of
whether the property continues to be used
for its intended purpose. The Guidance
modifies these recapture rules so that grant
funds may generally be recovered by
Treasury only if the facility is permanently
taken out of service or the direct ownership
of the facility is transferred to a disqualified
person (described below) (e.g., a
government or tax-exempt entity). Thus, a
sale of a facility generally will not result in
recapture.
The remainder of this alert summarizes the
requirements (including additional detail on the
requirements highlighted above) to receive a
Section 1603 grant as described in Section 1603 of
the 2009 Recovery Act and the Guidance.
Requirements for Receiving a Section
1603 Grant
Qualified Applicants
• Ownership. The Guidance provides that
applicants must be the owner (or lessee if
certain conditions, described below, are
met) of specified energy property and must
originally place the property in service in
order to be eligible to receive a Section
1603 grant.
•
Certain Foreign Persons Eligible to
Receive Section 1603 Grants. A foreign
person or entity is eligible for a Section
1603 grant only if more than 50% of the
gross income for the taxable year derived
by the foreign person or entity from the use
of the property is (i) subject to U.S. income
taxation, or (ii) included in the gross
income of a U.S. shareholder under section
951 of the Internal Revenue Code (the
“IRC”). In addition, as noted below under
“Qualifying Property,” such property must
be located in the United States.
•
Disqualified Persons. As provided by
Section 1603 of the 2009 Recovery Act, the
Guidance provides that the following
persons are not eligible to receive Section
1603 grants:
o Any Federal, state or local
government, including any
political subdivision, agency, or
instrumentality thereof;
o
Any organization that is described
in section 501(c) of the IRC and is
exempt from tax under section
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Tax and Energy & Utilities Alert
501(a) of the IRC;
o
o
•
•
Any clean renewable energy bond
lender, cooperative electric
company, or governmental body; or
Any partnership or other pass-thru
entity, any direct or indirect partner
(or other holder of an equity or
profits interest) of which is an
organization or entity described
above unless this person only owns
an indirect interest in the applicant
through a taxable C corporation.
Use of Blocker Corporations.
Notwithstanding the general rule above, the
Guidance clarifies that tax-exempt
organizations and foreign persons that
would not otherwise qualify as eligible
recipients may invest in a partnership or
other pass-thru entity through “blocker”
corporations without disqualifying the passthru entity as an eligible entity.
•
•
Qualifying Property. Specified energy
property includes only depreciable tangible
property that is both (i) used as an integral
part of the activity performed by a power
generating facility, and (ii) located at the
site of the power generating facility.
o
In determining whether property
qualifies as specified energy
property, in addition to meeting the
requirements noted above, rules
similar to those applied in
determining whether such property
qualifies for the investment tax
credit or the production tax credit
apply. For example, the Guidance
lists the following general rules
with respect to qualified property:
ƒ
Qualified property can
include an expansion of an
existing property that
would otherwise qualify
for the investment tax
credit or the production
tax credit.
ƒ
Qualified property does
not include a building, but
may include structural
components of a building.
ƒ
For qualified property that
generates electricity,
qualified property
includes storage devices,
power conditioning
equipment, transfer
equipment, and parts
related to the functioning
of those items, but does
not include any electrical
transmission equipment,
such as transmission lines
and towers, or any
equipment beyond the
electrical transmission
stage, such as
Time for Determining Eligibility.
Applicant eligibility is determined as of the
time the application is received by Treasury.
Qualifying Property – “Specified
Energy Property”
•
property, and geothermal heat pump
property.
Specified Energy Property. Property that is
eligible for a Section 1603 grant is defined
as “specified energy property” under
Section 1603 of the 2009 Recovery Act and
the Guidance.
Specific Types of Property. Specified
energy property includes: (i) qualifying
wind facilities, closed-loop biomass
facilities, open-loop biomass facilities,
geothermal facilities, landfill gas facilities,
trash facilities, certain hydropower
facilities, marine and hydrokinetic
renewable energy facilities; and (ii) certain
other energy property that is part of a power
generating facility, including certain solar
property, fuel cell property, microturbine
property, combined heat and power system
July 2009
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Tax and Energy & Utilities Alert
transformers and
distribution lines.
o
Business Property. Eligible
property under the Section 1603
grant program includes only
property used in a trade or business
or held for the production of
income. Non-business energy
property described in section 25C
of the IRC and residential energy
efficient property described in
section 25D of the IRC do not
qualify for Section 1603 grants.
Thus, solar and wind and other
energy efficiency property installed
by a homeowner would not qualify
for a Section 1603 grant.
o
Use in the United States. In
general, only property that is used
predominantly within the United
States (i.e., that is physically
located within the United States at
least 50% of the time) qualifies for
Section 1603 grants.
o
Original Use. The original use of
qualified property generally must
begin with the applicant. However,
the Guidance provides that an
applicant will not fail to be
considered the original user of
property merely because the facility
contains used parts if the cost of the
used parts within the facility is not
more than 20% of the total cost of
the facility.
o
Special Rules for Sale-Leaseback
Transactions. If certain conditions
are satisfied in a sale-leaseback
transaction, special rules apply (in
the same manner as such rules
apply to sale-leaseback transactions
that qualify for the investment tax
credit) so that 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.
•
Placed in Service Requirement.
o Generally, qualified property must
be (i) originally placed in service
between January 1, 2009 and
December 31, 2010, regardless of
when construction begins, or (ii)
placed in service after 2010 and
before the applicable credit
termination date (discussed below)
if construction of the property
begins between January 1, 2009
and December 31, 2010. For this
purpose, property is generally
treated as placed in service when it
is ready and available for its
specific use.
o
Safe Harbor for Beginning
Construction. Where, as noted
above, property will not be ready
and available for its specified use
by December 31, 2010, applicants
may qualify for a Section 1603
grant if construction of the
property began between January 1,
2009 and December 31, 2010.
Generally, construction begins
when physical work of a
significant nature begins. For this
purpose, the Guidance includes a
safe harbor for applicants, which
provides that an applicant may
treat physical work of a significant
nature as beginning when the
applicant incurs or pays more than
5% of the total cost of the
property. It is not clear whether
the determination that an applicant
has incurred more than 5% of the
total cost of the property will be
based on cost projections in respect
of a qualified facility or whether
such determination will not be
made until the facility is complete,
in which case the safe harbor will
not provide much comfort to
applicants.
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Tax and Energy & Utilities Alert
Credit Termination Dates and
Applicable Payment Percentages for
Specified Energy Property
Specified
Energy
Property
Credit
Termination
Date
Large Wind
January 1,
2013
January 1,
2014
January 1,
2014
January 1,
2014
January 1,
2014
January 1,
2014
January 1,
2014
January 1,
2014
January 1,
2017
January 1,
2017
January 1,
2017
January 1,
2017
January 1,
2017
January 1,
2017
January 1,
2017
Closed-Loop
Biomass
Open-Loop
Biomass
Geothermal
(IRC § 45)
Landfill Gas
Trash
Qualified
Hydropower
Marine &
Hydrokinetic
Solar
Geothermal
(IRC § 48)
Fuel Cell
Microturbine
Combined
Heat & Power
Small Wind
Geothermal
Heat Pump
is taken into account in computing the
Section 1603 grant.
•
Documentation Required and
Accountant’s Certification. Applicants
must submit with their Section 1603 grant
applications documentation supporting the
cost basis claimed for the property,
including a detailed breakdown of all costs
included in the basis. Additional
documentation, such as contracts, invoices,
and proof of payment, must be retained and
made available to Treasury upon request.
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.
•
Basis Reduced by 50% of Grant Payment.
Section 1603 grants do not constitute gross
income for the applicant. However, the
basis of the specified energy property to
which the grant relates must be reduced by
an amount equal to 50% of the grant
payment.
Applicable
Percentage of
Eligible Cost
Basis
30%
30%
30%
30%
30%
30%
30%
30%
30%
10%
30%
Repayment of Section 1603 Grants
•
Events Triggering Repayment. If (i) an
applicant disposes of specified energy
property to a disqualified person (as
defined above under “Qualified Applicants,
Disqualified Persons”), or (ii) the use of the
property changes such that the property
ceases to qualify as specified energy
property, within 5 years from the date the
property is placed in service, then the
applicant must repay a portion of the
Section 1603 grant to Treasury. In
general, the amount of the Section 1603
grant the applicant is required to repay is
dependent on the number of years the
applicant used the property for its
qualifying use before the applicant either
disposed of the property or changes its use
so that it is no longer qualifying property.
•
Sale of Specified Energy Property
Generally. Selling or otherwise disposing
of specified energy property to an entity
10%
10%
30%
10%
Cost Basis of Eligible Property
•
Calculation of Basis for Specified Energy
Property. Generally, the basis of specified
energy property is its cost. The eligible
basis of a qualified facility, however, does
not include the portion of the cost of the
facility that is attributable to a nonqualifying activity. Thus, only the portion
of a facility that is specified energy property
July 2009
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Tax and Energy & Utilities Alert
other than a disqualified person does not
result in a repayment obligation, provided
that (i) the property continues to qualify as
specified energy property and (ii) the
purchaser of the property agrees to be
jointly liable with the applicant for any
repayment obligation that occurs if the
property is resold to a disqualified person or
later ceases to qualify as specified energy
property. The applicant remains jointly
liable to Treasury for the repayment amount
even if the applicant no longer has control
over the property.
•
Exception for Disposal to Blocker
Corporations. As noted above, a taxable
corporation is not a disqualified person even
if some or all of its shareholders are
disqualified persons. In addition, such a
corporation’s ownership of an interest in a
partnership or other pass-thru entity does
not cause the partnership or other entity to
be treated as a disqualified person. Thus,
selling or otherwise disposing of specified
energy property to such a corporation
directly or to a partnership of which such a
corporation is a partner should not cause
these repayment rules to apply.
Special Rules Applicable to Leased
Property
•
•
eligible to receive Section 1603
grant payments.
Election to Pass Through a Section 1603
Grant to Lessor. A lessor eligible to
receive a Section 1603 grant with respect to
specified energy property may elect to pass
through the grant to a lessee of the property.
The election treats the lessee as having
acquired the property for an amount equal
to the independently assessed fair market
value of the property on the date the
property is transferred to the lessee, and
generally follows the rules governing
elections to allow lessees to receive energy
tax credits. Once made, the election is
irrevocable.
General Requirements
o The election is only available if
both the lessor and the lessee are
o
The election may not be made by a
lessor that is a mutual savings bank
or similar financial organization, a
regulated investment company, or
a real estate investment trust.
o
The lessor and lessee must agree
that the lessor waives all right to a
Section 1603 grant payment,
production tax credit, or
investment tax credit with respect
to the property before the lessee
can apply for a Section 1603 grant
with respect to the property.
o
In addition, the lessee must agree
to include ratably in gross income
over the 5-year recapture period an
amount equal to 50% of the
amount of the Section 1603 grant
in the event of recapture.
o
A copy of the lessor-lessee
agreement must be included with
the lessee’s application for the
Section 1603 grant.
•
Sale-Leaseback Transactions. In a saleleaseback transaction, the lessee, who is not
the owner of the property, may claim the
Section 1603 payment if (i) the lessee is the
person who originally placed the property
in service, (ii) the property is sold and
leased back to the lessee, or leased to the
lessee, within 3 months after the date the
property is originally placed in service, and
(iii) the lessee and lessor do not make an
election to preclude application of the saleleaseback rules.
•
Events Triggering Repayment of the
Section 1603 Grant. Where a lessor elects
to pass through the Section 1603 grant to a
lessee, if the lessor sells the property to a
disqualified person (described above), the
lessee is liable to Treasury for the recapture
amount even if the lessee maintains control
over the property. If the lease is terminated
July 2009
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Tax and Energy & Utilities Alert
and possession of the property is transferred
by the lessee to the lessor or any other
person, the lessee is liable to Treasury for
the recapture amount if the use of the
property changes during the recapture
period such that the property no longer
qualifies as specified energy property.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice
contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter
addressed herein.
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July 2009
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