Credits Against Tax
On Friday, December 17, 2010, President Barack Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (Tax Relief Act of 2010). This law brings good news to taxpayers planning to invest in renewable energy sources, extending for one year the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), Section 1603, grant in lieu of credit for specified energy property (1603 grant) application deadline from October 1, 2011, to October 1, 2012, and also extending for one year the construction start date or 5% safe-harbor requirement from December 31, 2010, to December 31, 2011. The Tax Relief Act of 2010 extends only the deadlines. It does not alter any other aspect of the 1603 grant program, which provides relief for many taxpayers that were struggling to structure construction projects and financial arrangements in time to start construction or incur 5% of the qualified costs by the end of the year.
Overview of the Section 1603 Renewable Energy Grant Program
Under Section 1603, a taxpayer can receive 10% or 30% of the cost basis of a qualified energy project as a cash grant for certain renewable energy property that is (1) placed in service in 2009, 2010, or 2011 (2009 or 2010 under the original law) or (2) placed in service after 2011 (originally 2010) but before the “applicable placed in service” deadline for such facility, but only if the construction of the property began during 2009, 2010, or 2011 (2009 or 2010 under the original Section 1603). The grant is in lieu of tax credits otherwise available under Sec. 48 for placing qualified energy property in service or under Sec. 45 for producing electricity from specified renewable sources. The purpose of the grant is to encourage investment in alternative energy sources and provide cash payments to taxpayers who during the economic downturn could not use the tax credits due to net operating losses or alternative minimum tax.
Property That Qualifies for the Grant and Respective Deadlines
To qualify for the 1603 grant, a taxpayer must place in service “specified energy property,” which includes only tangible personal property where depreciation or amortization is allowable. Specified energy property is defined in relation to Secs. 45 and 48 and is summarized in the exhibit.
In order to receive the grant:
- The qualified property must be placed in service between January 1, 2009, and December 31, 2011; or
- Construction on the property must begin between January 1, 2009, and December 31, 2011, and it must be placed in service prior to the credit termination date for the specific type of property that is reflected in the exhibit.
The taxpayer must submit the grant under both scenarios before October 1, 2012.
The placed-in-service requirement is relatively straightforward in that it is met when the property is ready and available for its specific use. This requirement is similar to the standard for investment tax credits and depreciation deductions.
Treasury, in its guidance on 1603 grants, provides that construction is considered to start when “physical work of a significant nature begins” and further describes when physical work begins for self-constructed property in comparison to property that is constructed by a third party under contract. The beginning-of-construction requirement can also be met under a safe-harbor rule, which provides that an applicant may treat physical work of a significant nature as beginning when the taxpayer incurs more than 5% of the qualified cost of the property.
Expenses Included in Eligible Basis
The basis of the property that is subject to the applicable percentage is generally its cost basis as reflected in Sec. 1012. This is total cost basis before being reduced by deprecation but including all items normally included in the depreciable basis of property (e.g., freight and installation costs). It is important to note, however, that costs deducted in the year in which they are paid or incurred are not includible in the basis (e.g., research and experimentation expenditures deducted under Sec. 174). In addition, if a qualifying energy property is associated with a nonqualifying energy property, the cost associated with a nonqualifying activity or property should not be included in the eligible basis.
To support the eligible basis calculation, an applicant must submit documentation that contains a detailed breakdown of all costs with its 1603 grant application. The applicant must retain and make available to Treasury on request other supporting documentation, such as contracts, copies of invoices, and proof of payment. Applicants must also submit an independent accountant’s certification under AICPA attestation standards for properties that have a cost basis in excess of $1 million attesting to the accuracy of all costs included in the eligible basis of the property, or under agreed-upon procedures for cost basis greater than $500,000 but less than $1 million. (See the independent accountant requirements on the Treasury website.)
Eligible applicants include U.S. taxpayers and taxpaying entities. Ineligible applicants under Section 1603 are specifically:
- Any federal, state, or local government (including any political subdivision thereof);
- Any organization that is described in Sec. 501(c) and is exempt from tax under Sec. 501(a);
- Any entity referred to in Sec. 54(j)(4), which includes clean renewable energy bond issuers or borrowers, cooperative electric companies, or governmental bodies;
- Foreign persons, unless more than 50% of the foreign person’s income from the use of the property is subject to U.S. income tax directly or its U.S. shareholder is taxed on its share of subpart F income as described in Sec. 168(h)(2)(B); or
- Any partnership or other passthrough entity that has as a partner, either directly or indirectly, one of the ineligible entities described in items 1–4, unless this person owns only an indirect interest in the applicant through a taxable C corporation.
It is important to note that this exception allows a person who would not be eligible to receive a grant to set up a “blocker” C corporation to hold its interest and still be able to receive the grant. This strategy has proved very successful for many taxpayers who without it would have been excluded from receiving grant funds.
Grant Application Process
Taxpayers may submit applications only after either the placed-in-service or beginning-of-construction requirement has been met. Treasury will consider an application if it contains the signed and complete application form, supporting documentation, signed terms and conditions, and complete payment information as detailed in the guidance available on the Treasury website. As stated above, all applications must be received before the recently extended due date of October 1, 2012. For property placed in service in 2009, 2010, or 2011, once Treasury has reviewed the application and determined that it is complete and that the property qualifies, Treasury will make payments to qualified applicants within 60 days from the date it receives the completed application.
If within five years the property is subject to a disqualifying event (i.e., it ceases to qualify as a specified energy property or is sold to a disqualified person), some or all of the grant must be repaid, depending on the length of time between the date the property was placed in service and the disqualifying event.
Many taxpayers, as well as the alternative energy industry, have lauded the extension of the 1603 grant. As outlined above, the grant is an exciting opportunity for many businesses to not only receive a cash incentive but also to engage in activities that will benefit the environment.
Neal Weber is managing director-in-charge, Washington National Tax, with RSM McGladrey, Inc., in Washington, DC.
For additional information about these items, contact Mr. Weber at (202) 370-8213 or email@example.com.
Unless otherwise noted, contributors are members of or associated with RSM McGladrey, Inc.