• Treasury Department Announces Direct Payments for Qualified Energy Property
  • August 4, 2009
  • Law Firm: Blank Rome LLP - Office
  •  Sensing a slow-down in the effectiveness of tax credits intended to lure investors into the renewable energy and clean energy markets, Congress included a new program in the American Recovery and Reinvestment Act (Recovery Act) to allow for direct payments of up to 30 percent for specified energy property in lieu of tax credits. To qualify for the direct payment, properties must forego tax credits under sections 48 and 45 of the Internal Revenue Code (IRC). Guidance for the program (Section 1603), to be administered by the Department of Treasury with assistance from the Department of Energy, was released on July 9. It can be found at:  http://www.treas.gov/recovery/1603.shtml. The Department of Treasury is expected to begin accepting applications for the program around August 1. Additional program guidance will be available at that time as well. Applications cannot be submitted until the property is placed in service or construction has begun. Treasury will make payments to qualified applicants within 60 days of the completed application being received by the agency. Unless extended by Congress, the program will remain open until October 1, 2011.

    The new program is open to properties, used predominantly in the United States, placed in service in 2009 and 2010. Alternatively, a property where construction begins by December 31, 2010 can still qualify as long as the property is placed in service by the credit termination date. The guidance clarifies the term construction as beginning “when physical work of a significant nature begins” and includes requirements for exactly what is intended by that statement. Applicants must meet various documentation requirements in their application depending on the type of property and whether the property is operating or simply under construction. A sample application form was released along with the guidance and is also available on the Department of Treasury website.

    Different types of properties are eligible for anywhere from 10 percent to 30 percent of the project cost. The credit termination date and the applicable percentage are laid out in the chart below.

    Specified Energy Property

    Credit
    Termination Date

    Applicable Percentage of Eligible Cost Basis

    Large Wind

    Jan 1, 2013

    30%

    Closed-Loop Biomass Facility

    Jan 1, 2014

    30%

    Open-loop Biomass Facility

    Jan 1, 2014

    30%

    Geothermal under IRC sec. 45

    Jan 1, 2014

    30%

    Landfill Gas Facility

    Jan 1, 2014

    30%

    Trash Facility

    Jan 1, 2014

    30%

    Qualified Hydropower Facility

    Jan 1, 2014

    30%

    Marine & Hydrokinetic

    Jan 1, 2014

    30%

    Solar

    Jan 1, 2017

    30%

    Geothermal under IRC sec. 48

    Jan 1, 2017

      10%*

    Fuel Cells

    Jan 1, 2017

         30%**

    Microturbines

    Jan 1, 2017

           10%***

    Combined Heat & Power

    Jan 1, 2017

    10%

    Small Wind

    Jan 1, 2017

          30%

     

    Geothermal Heat Pumps

    Jan 1, 2017

         10%

     

    The guidance also discusses the need for the Section 1603 payment to be repaid to the Treasury Department should an applicant, within five years from the date the property is placed in service, transfer the property to a disqualified person or the property ceases to qualify as a specified energy property. The repayment requirements are on a sliding scale starting with 100% should the disqualifying event take place within one year from the place in service date to 20% should the disqualifying event take place after four years but before five years from the date placed in service.

    Finally, entities that are not eligible to receive Section 1603 payments include:.

    • any Federal, state or local government, including any political subdivision, agency or instrumentality thereof 
    • any organization that is described in section 501(c) of the IRC and is exempt from tax under section 501(a) of the IRC
    • any entity referred to in paragraph (4) of section 54(j) of the IRC or 
    • any partnership or other pass-thru entity, any direct or indirect partner (or other holder of an equity or profits interest) of which is an organization or entity described above unless this person only owns an indirect interest in the applicant through a taxable C corporation.

    *      Geothermal Property that meets the definitions of qualified property in both § 45 and § 48 is allowed either the 30% credit or the 10% credit but not both.

    **     For fuel cell property the maximum amount of the payment may not exceed an amount equal to $1,500 for each 0.5 kilowatt of capacity.

    ***   For microturbine property the maximum amount of the payment may not exceed an amount equal to $200 for each kilowatt of capacity.