The American Recovery and Reinvestment Tax Act of 2009 created a program whereby the U.S. Department of the Treasury (the “Treasury”) would make grants to certain renewable energy projects in lieu of the investment tax credit. On July 9, 2009, the Treasury issued guidance for this program along with the application form.
Treasury Grants Generally:
The Treasury grants equal either ten percent (10%) or thirty percent (30%) of the tax basis of certain tangible property used in a renewable energy project, depending on the type of project. The following energy facilities are eligible for the grants: wind, biomass, geothermal, landfill gas, trash combustion, qualified hydropower, marine and hydrokinetic, solar, fuel cells, microturbine, combined heat and power and geothermal heat pumps.
To be eligible for the grant, the qualifying property must become operational (referred to as being "placed in service") before December 31, 2010. Alternatively, if construction of the qualifying property began before December 31, 2010, the placed in service date may be extended to a later date (depending on the type of project).
Beginning of Construction:
As noted above, the grant may be available if construction begins on qualifying property before December 31, 2010. The guidance states that construction begins when physical work of a significant nature has begun. A safe harbor allows this test to be met if an applicant incurs (in the case of an accrual basis taxpayer) or pays (in the case of a cash method taxpayer) more than 5% 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) before December 31, 2010.
If the applicant contracts with another person to perform the work (as will typically be the case) the work completed by December 31, 2010 must be completed pursuant to a written binding contract. The contract will only be considered binding if it is enforceable under state law. The guidance lists the following elements of a contract that must be met to be treated as binding:
- The contract must not limit damages to less than five percent (5%) of the total contract price;
- The contract must not be subject to a condition within the control of either party or a predecessor;
- The contract may be subject to insubstantial changes to its terms and conditions or provide that any term is yet to be determined by a standard beyond the control of either party; and
- The contract may have certain terms open for negotiation as long as it imposes significant obligations on the applicant or a predecessor.
The guidance further states that the following contracts will not be considered binding:
a. A contract with a contractual provision that provides a full refund of the purchase price in lieu of any damages allowable by law in the event of a breach or cancellation;
b. An option to purchase or sell property; and
c. A supply, or similar agreement if the amount and design specifications of the property to be purchased have not been determined.
Units of Property:
The Treasury also provided guidance on what qualifies as a unit of property for determining when construction has started on the property or the date the property is placed in service. All components of a larger property will be considered part of a single unit if the components are functionally interdependent. For example, the Treasury said that an electricity generating wind turbine, its tower and its supporting pad are all part of a single unit of property.
Additionally, the owner of multiple units of property may elect to treat the units as a single unit for purposes of determining when the property is placed in service. However, if the owner makes this election, the entire cost of the property must be taken into consideration when attempting to qualify for the five percent (5%) safe harbor discussed above.
If the applicant elects to treat multiple units of property as a single unit, and is unable to place the entire project in service before December 31, 2010, the applicant will not be disqualified from receiving the grant. Instead, the applicant may receive a portion of the grant as determined by the property timely placed in service. For example, if a wind farm can only place 40 of 50 planned turbines in service by the January 1, 2013 extended deadline, the applicant will still be eligible for a grant based on those 40 turbines.
Another requirement for the grant is that the property’s original use must begin with the applicant. In a sale-leaseback transaction, the lessor is considered as the original user of the property if the property is originally placed in service by the lessee and the property is sold and leased back within three months after the property was originally placed in service by the lessee. Moreover, the property is considered to be placed in service no sooner than when it is used under the lease back.
A lessor who is eligible to receive the grant may instead elect to pass the grant on to the lessee of the energy property under procedures outlined in the guidance.
If the property was transferred to certain disqualified persons (e.g., tax-exempts, government entities, etc.) within a five year period and/or ceases to qualify as eligible property, the applicant must repay the grant to the Treasury. The amount of the repayment declines over time.
The application for the grant must be filed before October 1, 2011. The grant will be paid within sixty (60) days after receipt of the application by the Treasury. If the applicant is not able to place the property in service by December 31, 2010, but has been able to start construction by this date, then documents must be submitted that demonstrate that more than five percent (5%) of the total cost of the property has been incurred or paid (as described above). Once the property is placed in service, ongoing reporting must be submitted.
Terms and Conditions: http://www.treas.gov/recovery/docs/energy-terms-and-conditions.pdf
Sample Application Form: http://www.treas.gov/recovery/docs/Application.pdf
Pursuant to the rules of professional conduct set forth in Treasury Department Circular 230, this communication was not written or intended to be used, and it cannot be used for the purpose of avoiding federal tax penalties.