Treasury's limited time offer: cash grants for specified capital investments.

• Author: Shah, Amish M.

When tax credits of up to 30 percent of the cost of certain capital projects were not sufficient to spur the desired capital investments, Congress enacted a temporary program to provide taxpayers an election to obtain an immediate cash grant in lieu of those tax credits. The grant program, which is administered through the Department of the Treasury, is expected to pay out more than $30 billion; the total amount available for payout, however, is not capped and may well exceed that amount. Companies, regardless of their industry or size, that are considering making capital investments or that have high energy demands should consider taking advantage of this grant program. In particular, because the technical rules for obtaining the grant are closely tied to provisions of the Internal Revenue Code, tax directors and other tax professionals should be aware of this limited time offer.

This Treasury grant is available for investments in projects that generate energy from certain renewable resources including, among others, solar, wind, biomass, and municipal solid waste. While the renewable energy sector has clearly focused on this grant program, many companies wholly outside of the renewable energy sector may similarly take advantage of this program. For example, (1) companies with large, flat rooftop space can utilize currently vacant space to install solar panels to meet their own electricity needs or to sell electricity onto the grid; (2) companies with large energy demands, such as those with manufacturing facilities, can co-locate a renewable energy project to meet the energy needs of the manufacturing facility thereby avoiding purchases of electricity from the grid; and (3) companies with available investment capital can invest in renewable energy projects with experienced renewable energy project developers who are seeking financing. Assuming the technical requirements for obtaining the grant are achieved, with respect to each of these illustrated renewable energy project investments, Treasury will provide a grant equal to 30 percent (or 10 percent in limited cases) of the project cost. Moreover, these investments offer other benefits including additional state tax credits or cash grants, fixed long-term energy costs in an era of rapidly rising energy costs and public relations benefits from "going green."

Evolution of the Treasury Grant Program

The Treasury grant program arises out of the tax credits available under sections 45 and 48 of the Internal Revenue Code and relies heavily on certain of the provisions of those sections. (1) Section 45 provides a production tax credit during the 10-year period following the completion of construction of certain renewable energy projects. The amount of the production tax credit is determined by reference to the amount of electricity produced by the project--either 2.1[cents] or 1.1[cents] per kilowatt hour, depending on the type of renewable energy used by the project. Section 48 provides an investment tax credit in the taxable year(s) during which a renewable energy project is constructed. The amount of the investment tax credit is determined by reference to the capital cost of the project and is either 30 percent or 10 percent of such cost.

Since the tax credits are nonrefundable, they provide a benefit only to those with sufficient tax liability to utilize the credits. Because many renewable energy project developers lack sufficient tax liability, before the legislation projects were often structured using a so-called tax equity investor, a person with sufficient appetite to utilize the tax credits. In other words, the use of a tax equity investor allowed the developer to monetize the tax credit. The structure typically involved either a flip structure transaction (2) or a sale-lease back transaction, (3) which both allocated all or a portion of the tax credits to the tax equity investor. In exchange, the developer received highly favorable equity financing from the tax equity investor. Because of the economic downturn, however, the pool of potential tax equity investors shrank considerably as their tax liability projections were revised downward. Consequently, the development of renewable energy projects slowed significantly in the latter part of 2008.

Recognizing the effective unavailability of the section 45 and 48 tax credits, Congress included the Treasury grant program in the American Recovery and Reinvestment Act of 2009 (ARRA). The legislation permits persons...