Grants in Lieu of Business Energy Credits

The American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), included the option to receive a cash grant in lieu of taking the business energy credit for taxpayers who place in service specified energy property (ARRA §1603). Congress recognized that taxpayers with renewable energy projects were having financing difficulties in the tight credit market and that credits did not provide an incentive for those taxpayers with no taxable income during the down economy. The goal of the grants was to rectify both these situations by replacing the tax credit with a cash payment. Details on how to obtain one of these grants were limited until July 9, 2009, when Treasury issued guidance (available at www.treas.gov/ recovery/docs/guidance.pdf). Treasury began accepting applications on July 31, 2009, and cash payments were scheduled to begin in October 2009.

Eligible Property

Two categories of property are eligible to receive the energy grants: those that qualify for the business energy investment tax credit (ITC) under Sec. 48 and those that qualify for the renewable electricity production tax credit (PTC) under Sec. 45 but elect to qualify under the ITC instead. ITC property qualifying for a 30% grant includes solar, qualified fuel cell, and qualified small wind energy property. ITC property qualifying for a 10% grant includes geothermal, qualified microturbines, and combined heat and power system property. Fuel cells are limited to $1,500 per 0.5 kilowatt capacity and microturbines to $200 per kilowatt capacity. PTC property qualifying for a 30% grant includes landfill gas, wind, biomass, hydroelectric, geothermal, marine, and hydrokinetic facilities. Energy producers cannot claim the PTC when they elect to qualify under the ITC.

Eligible basis of the energy property is calculated in the same manner as under the tax credit rules and includes equipment cost, installation, delivery, etc. Documentation of eligibility, basis calculation, and placed-in-service date must be submitted with the grant application. This includes an independent accountant’s certification for properties with a cost basis in excess of $500,000. Copies of invoices, contracts, check copies, etc. do not need to be submitted but must be retained by the applicant and may be requested by Treasury. No grant is allowed for the portion of the cost of the property for which the Sec. 179 deduction will be taken. As with the tax credits, the depreciable basis of the property is reduced by one-half of the grant amount received. In addition, there is a five-year, prorated recapture period for both credits and grants if the property is disposed of or ceases to qualify during that period.

Not all entities are eligible to receive the energy grants. Governments, tax-exempt organizations, foreign persons or entities, and renewable energy bond lenders do not qualify. There is an exception for foreign persons and entities if 50% or more of the gross income from the property is subject to U.S. federal income tax. In addition, passthroughs having even one of these unqualified entities as an equity owner will also be ineligible for the grants. This could be a particular issue for projects financed by private equity funds with tax-exempt pension plans as members. Co-ops, real estate investment trusts, and leased equipment will qualify in certain circumstances.

The option to take a grant instead of a tax credit is available only for property placed in service between January 1, 2009, and December 31, 2010, or for property on which construction began between January 1, 2009, and December 31, 2010, and that was placed in service prior to the credit termination date. The credit termination dates vary between December 31, 2012, and December 31, 2016, based upon the type of technology. If construction began before 2009, the property must be in service by December 31, 2010, and the grant application must be submitted after the in-service date but before October 1, 2011. If construction began in 2009 or 2010, the grant application must be submitted after construction began but before October 1, 2011. “Placed in service” is defined as a property’s being ready and available for its specified use. Construction is considered to have begun once physical work of a significant nature has started. Incurring or spending 5% of the total cost of the property is considered a safe harbor for beginning construction.

Treasury began accepting grant applications through its website beginning on July 31, 2009. It says that payments will be made within 60 days after the later of the date the completed application is received or the date the equipment is placed in service. In order to submit the online application, all applicants must complete the federal government’s central contractor registration (at https://www.bpn.gov/ ccr/) and have a Dun and Bradstreet number. The grant application also requires extensive technical information about the related property. Applicants who submit incomplete applications will be notified of the needed corrections and will have 21 days to submit the requested information.

Conclusion

One of the primary goals of the grant program was to make it easier to obtain financing of renewable energy projects. However, it is unclear whether this will actually occur, especially for smaller projects. The grants will definitely be appealing for self-financed projects where the owners lack current tax liability. The effect on traditional bank financing may be much more limited. Some bankers have indicated that the back-end nature of the grants makes them much less attractive than if there were an upfront option. Treasury has attempted to address this concern by adding the ability to assign the grant payment to a financial institution, although the payment still comes after the project is completed. Finally, there is some overall skepticism about the government’s ability to follow through on the program’s promises. This should be alleviated once the application process and grant payments have time to get more firmly established.

EditorNotes

Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

For additional information about these items, contact Mr. Koppel at (781) 407-0300, or mkoppel@gggcpas.com.