Energy Law Update: Government Offering Payments in Lieu of Tax Credits to Companies Installing Renewable Energy Production Facilities
Earlier this month, the U.S. Department of the Treasury ("Treasury") and the U.S. Department of Energy announced a new partnership aimed at increasing economic development in urban and rural areas while also increasing energy independence. Under the program, funded through the American Recovery and Reinvestment Act ("Recovery Act"), approximately $3 billion will be made available in the form of direct payments for the development of an estimated 5,000 biomass, solar, wind, and other renewable energy production facilities around the country. The payments will be in lieu of tax credits that would otherwise have been available. Eligible property under this program includes only property used in a trade or business or held for the production of income. Nonbusiness energy property described in Section 25C of the Internal Revenue Code ("IRC") and residential energy-efficient property described in Section 25D of the IRC do not qualify for payments under this program.
Previously, companies that created and placed in service renewable energy facilities could file for a tax credit to cover a portion of the renewable energy project's cost; under the new program, which began on January 1, 2009, applicants building such renewable energy facilities can agree to forgo tax credits down the line in favor of an immediate reimbursement of a portion of the property expense. This direct payment program is intended to provide an immediate stimulus in local economies by providing payments of 10% to 30% of the eligible cost basis of qualified property.
In order to be eligible, the applicant must be the owner or lessee of a specified energy property that qualifies for funds under Section 1603 and must be the original user of the property. Where the applicant is the lessee of the specified energy property, the owner of the specified energy property must have agreed, in writing, to the lessee being the recipient of the Section 1603 payment and must have waived, in writing, its right to receive any payment under Section 1603 as well as its right to claim a tax credit under Sections 45 and 48 of the IRC with respect to the property. Federal, state, and local governments, as well as any political subdivisions, agencies or instrumentalities thereof are not eligible. Similarly, tax exempt 501(c) organizations and entities referred to in Section 54(j)(4) of the IRC may not participate in the program. The applicant may not be a foreign person or entity unless it is a foreign person or entity that qualifies for the exception in Section 168(h)(2)(B) of the IRC. Finally, the applicant must agree not to claim a tax credit under Section 45 or Section 48 of the IRC with respect to the property described in the application.
Qualified property must be originally placed in service between January 1, 2009, and December 31, 2010, regardless of when construction begins, or placed in service after 2010 and before the credit termination date specified for each category of renewable energy projects - e.g., wind, solar, geothermal, fuel cell, hydropower, etc. - if construction of the property begins between January 1, 2009, and December 31, 2010. Qualified property includes expansions of an existing property that is qualified property under Section 45 or 48 of the IRC.
The program requires the applicant to certify to the Treasury on an annual basis for a period of five years from the date the property was placed in service that the property has not been disposed of to a disqualified person and that the property continues to qualify as specified energy property. Within that five year period, if the property is disposed of to a disqualified person and/or ceases to qualify as a specified energy property, the applicant must repay some or all of the funds to the Treasury. How much must be repaid depends on how long the property has been in service.
Applicants interested in receiving payments under Section 1603 may submit an application on-line by going to www.treasury.gov/recovery. There, applicants will find additional guidance on what equipment is eligible under each of the specified energy property categories. Applications may only be submitted after the property to which the application relates is placed in service or is under construction. A completed application will include the signed and complete application form, supporting documentation, signed Terms and Conditions, and complete payment information. All applications must be received before the statutory deadline of October 1, 2011.
Kathy Milenkovski
Huntington Center
41 South High St., Suite 2200
Columbus, Ohio 43215
614.458.9792
kathy.milenkovski@steptoe-johnson.com
This alert is a periodic publication of Steptoe & Johnson PLLC and should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The content is intended for general information purposes only, and you are urged to consult your own lawyer concerning your own situation and any specific legal questions that you may have. For further information about these contents, please contact Steptoe & Johnson PLLC.