Congress Offers Immediate Cash Payments in Lieu of Energy Tax Credits
Congress has provided taxpayers with a potentially valuable but little-known means of receiving an immediate cash payment in lieu of certain energy-related tax credits. Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 directs the Treasury Department to make payments to persons who place in service specified energy property and who apply for such payments (Section 1603 payments). The purpose behind the Section 1603 payments is to create an incentive for new and continued investment in renewable energy projects that tax credits may not otherwise provide given the current state of our economy. It is expected that the Section 1603 payments will encourage and expand investment in clean and renewable energy, create jobs, and at the same time decrease the dependency on non-renewable energy sources.
As detailed in the Treasury Department’s recently published guidance, in order to receive a Section 1603 payment, applicants must elect to forego the production or investment tax credits available under sections 45 and 48 of the Internal Revenue Code (IRC) with respect to such property for the taxable year in which the payment is made or any subsequent taxable year. Section 1603 payments are not includible in the recipient’s income, but do require certain basis adjustments.
Persons not subject to federal income tax liability (including state and local governments, section 501(c) organizations, and certain pass-through entities) are ineligible to receive a Section 1603 payment.
Under section 1603 of the Act, qualified taxpayers may apply for an immediate cash payment equal to 30 percent of the unadjusted basis in the following types of “specified energy property”: (i) “qualified facilities” eligible for a credit under section 45, including those related to wind, biomass (open or closed-loop), geothermal (under IRC Section 45), landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy; (ii) qualified fuel cells; (iii) solar; or (iv) qualified small wind energy projects. A cash payment equal to 10 percent of the basis in the specified energy property can be claimed for: (i) geothermal (under IRC Section 48); (ii) qualified microturbines; (iii) combined heat and power; or (iv) geothermal heat pumps. In general, the specified energy property must be used predominantly within the United States (that is, if the property is located outside the United States during more than 50 percent of the year, then such property is ineligible for the payment).
To be eligible for the payment, the specified energy property must be originally placed in service by the taxpayer in either 2009 or 2010 (regardless of when construction begins). Alternatively, a Section 1603 payment is available for specified energy property with respect to which construction begins in either 2009 or 2010and that is placed in service prior to a specified “credit termination date”(ranging from January 1, 2013, to January 1, 2017, depending on the nature of the project). When construction begins on a project for this purpose is determined using rules mirroring those in other areas, including the bonus depreciation regulations.
Additionally, eligible property includes only tangible property that is an integral part of and located at the site of the qualified facility. Qualified property does not include buildings, but may include the structural components of a building. Examples of property that may be integral to the facility include roadways or paved parking areas located at the facility and used for transporting material processed at the facility or equipment used in maintaining and operating the facility.
Under certain circumstances, lessees may claim Section 1603 payments otherwise payable to the owner of the specified energy property. This generally requires that the lessor make an election, which essentially treats the lessee as having acquired the property. The lessee must provide written consent for such an election, and the lessor must waive the right to receive any payments. Section 1603 also provides special rules in the context of a sale-leaseback transaction, whereby the lessee may claim the Section 1603 payment if certain conditions are met.
Recapture provisions apply if either the property ceases to qualify as specified energy property within five years of its having been placed in service, or if the taxpayer disposes of the property within that period. Any recapture amount is a debt owed to the United States and is enforceable by all available means, including enforcement by the Justice Department against all property of the applicant. Thus, this debt is not a tax liability and not under the jurisdiction of IRS collection process, even though many of its operative provisions are based on Internal Revenue Code concepts. Applicants are under a reporting obligation to annually certify to the Treasury Department for a five-year period that the property has not been disposed of to a disqualified person and that the property continues to qualify as specified energy property.
For property placed in service in 2009 or 2010, the taxpayer must submit an application with required documentation to the Treasury Department after the property is placed in service, but before October 1, 2011. For projects not placed in service in 2009 or 2010, the application must be submitted after construction begins, but before October 1, 2011, and be supplemented as necessary after the project is placed in service. If the property has been placed in service at the time of the application, the Treasury Department will make payments to qualified applicants within 60 days of the receipt of the completed application. If not, then the payment will be made within 60 days of the placed-in-service date.
The Treasury Department, with the assistance of the Energy Department, is administering this program and is currently accepting applications for Section 1603 payments. The application is fairly straightforward and requests information about both the applicant and the specific property. The application asks for additional documentation from the applicant, including: (i) documents that establish that the property has been placed in service; (ii) documents indicating that the property qualifies as specified energy property; and (iii) documents establishing the cost basis of the property. Further, for payments of $1 million or more, applicants must submit an independent accountant's certification attesting to the accuracy of the costs claimed as part of the basis of the page 3 property. For those payments of less than $1 million but greater than $500,000, the applicant must submit a report of agreed upon procedures prepared by an independent accountant so that the Treasury Department may confirm the costs associated with the property.
The applicant is responsible for ensuring that the information provided is accurate, as the Treasury Department will, for the most part, rely on that information in providing Section 1603 payments. Applicants are under a continuing obligation to inform the Treasury Department if the information is incorrect or inaccurate, and, if so, the Department may require that the applicant return the disbursed funds.
In conclusion, section 1603 of the American Recovery and Reinvestment Tax Act of 2009 provides a valuable incentive in the form of immediate cash payments for new and continued investment in renewable energy projects for a wide range of taxpayers, including those in a net operating loss position for whom a tax credit has little current value, as well as any eligible taxpayer seeking to maximize its current cash flow. Taxpayers interested in applying for Section 1603 payments should carefully review the requirements of section 1603, including its detailed application procedure, in order to ensure qualification for such payments.
For further information regarding Section 1603 payments, please contact any of the following lawyers of the Miller & Chevalier tax group:
Leonard Bickwit, email@example.com, 202-626-6030
Marc Gerson, firstname.lastname@example.org, 202-626-1475
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