Sequestration Impacts on 1603 Grants for Solar Projects
PALO ALTO, CA—The American Recovery and Reinvestment Act of 2009 created the Section 1603 Grant in Lieu of Tax Credit program for qualified renewable energy property (“Section 1603”). Under Section 1603, generally, the Secretary of the Treasury provided grants (as an alternative to “investment tax credits” issued pursuant to Section 48 of the Internal Revenue Code of 1986 (“IRC”)) to eligible persons, who place in service qualified energy property and apply for such payments. Grants are awarded under Section 1603 to reimburse eligible applicants for a portion of the expense of such property. Section 1603 further provides that the amount of a grant with respect to any qualified energy property is the applicable percentage (either 30% or 10%) of the basis of such property.
On August 2nd, 2011 Congress passed and the President signed the “Budget Control of Act of 2011”. Among other things, the Budget Control Act raised the federal debt limit, created a so-called “Super Committee” to identify $1.2 trillion in budget savings over the following ten (10) years and provided for expedited consideration in Congress of the Super Committee’s recommendations. As we all know, the Super Committee failed to agree upon much of anything. The impact of this failure was the implementation of budget sequestration, which provided for automatic, across-the-board spending reductions.
The Office of Management and Budget (OMB) released, in 2012, an initial report on the sequestration and its potential impacts on federal activities including, without limitation, Section 1603 grants awarded by the Treasury in 2013. In late 2012, Congress delayed the original January 1st, 2013 sequestration implementation date for two (2) months.
On March 4th, 2013, the United States Treasury provided additional information clarifying how sequestration cuts are to be applied to the Section 1603 Treasury grant program. Specifically, the Treasury advised that it would apply an 8.7% grant reduction to applications that are issued a “Section 1603 Award Letter” between March 1st, 2013 and September 30th, 2013 and that it would apply a 7.2% grant reduction to applicants that are issued a “Section 1603 Award Letter” between October 1st, 2013 and September 30th, 2014. This reduction was effective regardless of when the project was placed in service or when the application was actually filed.
One question that remained arguably unanswered following the Treasury’s guidance was how a reduced Section 1603 grant payment made during the March 1st through September 30th time period impacted the applicable basis of the qualified energy property used for determining the Section 1603 award. (In this context, “award” means the final decision by Treasury to pay a claim as evidenced by the “Section 1603 Award Letter” and the effective the date of such letter.) On June 10th, 2014, the IRS answered the question in its issuance of Notice 2014-39.
Notice 2014-39 clarifies that applicants subject to sequestration will not be able to partition the basis of the qualified energy property for which it receives a Section 1603 award and claim a tax credit under Section 48 of the IRC with respect to any part of the basis of the same property. The applicant is also required to reduce its basis in the energy property by 50% of the reduced Section 1603 grant received.
The IRS provided the following example, which is illustrative:
“On August 1, 2012, a taxpayer submits an application to Treasury under Section 1603 of ARRTA for specified energy property (Property) that has a basis of $100 million. On May 1, 2013, Treasury grants the taxpayer a Section 1603 Award as evidenced by a Section 1603 Award Letter. Because Property has a basis of $100 million, the Section 1603 Award is $30 million. However, due to the sequestration rate of 8.7%, the taxpayer receives a Section 1603 Payment of $27,390,000. This reduced payment does not affect the amount of the $30 million Section 1603 Award. The taxpayer may not claim a credit under section 45 or 48 on any part of the basis of Property. The taxpayer must reduce the basis of Property by 50% of the amount of the Section 1603 Payment, or $13,695,000.”
It remains to be seen what impact, if any, Notice 2014-39 will have on solar energy projects that were planned and financed prior to sequestration. However, it does means that (i) an applicant must choose either an investment tax credit under Section 48 of the IRC or a Section 1306 grant for each energy property and (ii) only one form of benefit or incentive may be claimed.
Michael C. Polentz is co-chair of the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips LLP, located in the Palo Alto office. The views expressed in this column are the author’s own.
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