Not even Franklin Delano Roosevelt could have imagined the scope and breadth of the current federal programs to stimulate the economy. Some of the new federal programs require standing in a different kind of line — a line to obtain grants set aside for energy-related projects and, unlike the FDR programs, it appears to be the race goes to the swift.
The U.S. Department of Treasury recently released its long-anticipated guidance on payments for specified energy property in lieu of tax credits (Section 1603 Grants). Since August 1, when the application became available online, this program has been a hit with the energy and investment communities. In the first 45 days of the program, the Treasury Department has issued checks totaling $1.05 billion on 40 projects. While the program does not expire until October 1, 2011, projects must generally be commenced during 2009 or 2010, and the projects must be placed in service by various dates, as further explained below. The Section 1603 Grant is received within 60 days of filing a completed application or placing the property in service, whichever is later.
If you have current or potential projects that may benefit from these grants, you should review the application as well as consider the following information about the program.
The Section 1603 grants under the American Recovery and Reinvestment Act of 2009 (ARRA) provides for cash grants equaling 30% of the basis of “specified energy property” (10% for certain property). For this purpose, “specified energy property” generally includes two broad categories of property, IRC Section 45 (renewable-based electricity production property) and Section 48 (qualifying alternative energy credit property). Expansions of existing Section 45 and 48 properties are also eligible for the grants. The government is offering cash grants rather than credits based on the “diminished investor demand for income tax credits” in the current economic climate.
We note that the Section 1603 Grant is not subject to federal income tax (there is an exception for certain leases), but may be subject to state income/franchise or gross receipts tax. Instead, the basis of the “specified energy property” is reduced by an amount that is equal to 50% of the cash grant.
To determine basis of the property, the guidance adopts the general rules of determining basis for federal income tax purposes. Generally, the basis is the cost of the property placed in service after 2008, “unreduced by any other adjustments to basis, such as that for depreciation, and includes all items properly included by the taxpayer in the depreciable basis.”
To be eligible for the Section 1603 Grant, the specified energy property must be originally placed in service by the owner or lessee. “Specified property” is depreciable (or amortizable in lieu of depreciation) “tangible personal property” and other tangible property (excluding buildings) as defined in the Income Tax Regulations. The tangible personal property must be an integral part of the facility and must be located at the facility. “Placing the property in service” means that the specified energy property is ready and available for its specific use. Where a project contains used parts, the property still qualifies for “original use” if the cost of the used parts is not more than 20% of the total cost of the facility.
There are four categories of persons who are not eligible for the Section 1603 Grant:
- Any federal, state or local government
- Any organization described in IRC Section 501(c) and exempt from tax under IRC Section 501(a)
- A clean renewable energy bond dealer or a cooperative electric company
- Any partnership or pass-thru entity, any direct or indirect partner of which is an organization or entity described in categories one to three above, unless the person only owns an indirect interest in the applicant through a blocker sub (e.g., a taxable C corporation).
The property must be placed in service by a date known as the “Credit Termination Date,” which varies with the type of project. The applications are due, even for projects that have started construction in 2009 or 2010 but have not been placed in service during those years, by the statutory deadline of October 1, 2011.
The Treasury Department promises payment of the Section 1603 Grant within 60 days of either placing the property in service or receiving a completed application, whichever is later. For those projects under construction, the Treasury Department proposes to review the application materials and notify the applicants whether the eligibility requirements, through the date of application, have been met. Once the applicant completes construction, the company has 90 days after placing the property in service to submit supplemental information to the Treasury Department for it to make a final determination on eligibility. For applications that require supplemental information, the Treasury Department will provide notification, and the applicant has 21 days to provide such information to the Treasury Department.
Structuring Section 1603 Grant Investments
The investment can be made through a partnership or limited liability company, but each partner/member must be eligible for the credit. However, an ineligible investor can invest through a taxable C corporation. While non-U.S. investors are generally not eligible, certain exceptions may apply.
Though the grant is generally available to owners of property, it is also available to lessees in certain circumstances. For example, it is available to the lessee in a sale/leaseback transaction if three conditions are satisfied:
- The lessee must be the person who originally placed the property in service;
- The lessee must have sold and leased the property within three months after the date the property was originally placed in service; and
- The lessee and the lessor must not make an election to preclude application of the “sale-leaseback” rules.
If a Section 1603 Grant is received for property and the property is disposed of within five years of placing the property in service or the property no longer qualifies as “specified energy property,” the grant must be repaid to the Treasury Department on a declining, pro-rata basis over five years. That is, recapture is 100% in the first year, 80% in the second year and so forth.
The Treasury Department has also issued guidance (Notice 2009-52) on electing an investment tax credit based on the cost of a facility (similar to those for solar and fuel cells) rather than based on the production of electricity. As noted by the government, cash grants may be a more attractive option these days than a tax credit.
Gregory Burkart is a managing director in the Detroit office of independent financial advisory and investment banking firm Duff & Phelps. His 13 years of experience includes specialization in the structuring and negotiating of government-sponsored economic development incentive packages. Having previously served as former Michigan Governor Engler’s Environmental Ombudsman, Gregory is an expert on domestic and international site selection; economic incentives negotiation; decision analysis; and demonstrating development projects’ economic and fiscal impact to state and local governments.
Jerome Schwartzman is a managing director in the New York office of independent financial advisory and investment banking firm Duff & Phelps. Jerome has more than 18 years of experience as a tax specialist and attorney, primarily in the areas of mergers and acquisitions, transaction consulting and bankruptcy. He has vast expertise in tax issues related to domestic and international transactions and has served private equity funds, public and private companies and numerous investment banking firms. Jerry has also served as an expert witness in a number of litigation and arbitration matters.
[Editor’s note: To read about a project that went through the process and received funding, check out Peter Lynch’s Ask the Experts article: How to Get Renewable Energy Grant Money from the U.S. Government. ]