New Energy Tax Credit Program Guidelines Released, Preliminary Applications are due September 16, 2009August 20, 2009
The American Recovery and Reinvestment Act of 2009 ("ARRA") added new Section 48C to the Internal Revenue Code ("Code"). Under Section 48C, $2.3 billion is allocated to fund tax credits for qualified energy projects that re-equip, expand, or establish a manufacturing facility in order to produce advanced energy property (as described below). The tax credit is very valuable, as it is generally equal to 30% of equipment cost. This update provides an overview of the tax credit application process, with a focus on the preliminary application that must be submitted to the Department of Energy ("DOE") by September 16, 2009.
Preliminary applications for the DOE are due September 16, 2009. Applicants must submit a preliminary application to be considered in the first round of applications. A second round of applications will only be accepted if the first round fails to successfully award the entire $2.3 billion available for credits. Qualifying taxpayers should apply for the credit now, otherwise the opportunity to claim this tax credit may be lost.
The tax credit applies to projects that re-equip, expand, or establish a manufacturing facility in order to produce advanced energy property, including certain property that is:
- Designed for use in the production of energy from renewable resources, including (but not limited to) sun, wind and geothermal deposits;
- Fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles;
- Electric grids to support the transmission of intermittent sources of renewable energy, including property for the storage of such energy;
- Property designed to capture and sequester carbon dioxide and sequester carbon dioxide emissions;
- Property designed to refine or blend renewable fuels (but not fossil fuels) or to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies);
- New plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components that are designed specifically for use with such vehicles, including electric motors, generators, and power control units; or
- Other property designed to reduce greenhouse gas emissions (as determined by the Internal Revenue Service).
The qualifying property must be necessary for the production of energy property, as listed above, and it must be depreciable or amortizable tangible property that is not a building or its structural components. Additionally, to qualify for the tax credits, a manufacturing facility must make or process raw materials into finished products (or perform some intermediate task in that process). A taxpayer is not eligible for this program if the taxpayer is otherwise eligible for tax credits under Code sections 48, 48A, or 48B, or if the taxpayer has received a grant payment in lieu of a tax credit under the program established by Section 1603 of ARRA.
Competitive Application Procedure
Applications go through a number of steps in order to receive the credit. Preliminary applications are first submitted to the DOE (due September 16, 2009), with final applications submitted to the DOE by October 16, 2009. The DOE will perform an initial review of the application and will recommend and rank applications for the purpose of receiving the credit. Applications for tax credit certification must then be submitted to the Internal Revenue Service by December 16, 2009. The Service will accept or reject this application by January 15, 2009.
The Service will award the credits based solely on the DOE's ranking of applications. The highest ranked applicant will receive its requested credit allocation, then the second-highest ranked applicant will receive its requested credit allocation, and so on until the credits are exhausted. As a result, while the credit allocations are technically made by the Service, the determination of which projects will receive allocations will be made wholly by the DOE.
After certification is received, other important deadlines apply, as summarized below:
Deadline Summary (Assuming Tax Credits Allocated to Taxpayer)
Preliminary DOE Application; Deadline: September 16, 2009
Final DOE Application; Deadline: October 16, 2009
Application to Treasury ; Deadline: December 16, 2009‡
Service Acceptance of Applications; Deadline: January 15, 2010
Tax Credit Agreement Signed; Deadline: March 15, 2010
All Permits in Place for Project; Deadline: Approximately January 2011*
Service Certification of Project; Deadline: Approximately January 2011+
Place Project in Service; Deadline: Approximately January 2014†
‡ Since all applications must be reviewed by the DOE, taxpayers should submit their application to Treasury concurrently with submitting the final DOE application.
* Permits must be in place one year after receiving the initial certification from the Service.
+ Taxpayer must provide documentation of project progress one year after receiving the initial acceptance from the Service.
† The property must be placed in service three years after the taxpayer receives the initial certification from the Service.
Application Procedure Process -- DOE Applications
Preliminary Applications due to DOE September 16, 2009. A preliminary application must be submitted to the DOE by September 16, 2009. The preliminary application includes:
- An estimate of the qualifying investment and the amount of tax credit requested.
Comment: The DOE requests an accurate estimate of the qualifying investment/tax credit request and suggests that initial numbers should be within 10% of those submitted on the final application.
- A narrative description of the project, including:
Summary of project
- The advanced energy property that will be produced
- Current project status and project to date
- Project schedule and milestones through the expected placed-in-service date for the property.
Comment: The narrative description is limited to 300 words, so applicants must concisely describe project details.
Final Applications due October 16, 2009. The final applications are due by October 16, 2009. The final application is much more detailed and includes, among other requirements, a detailed project information memorandum describing the project, including:
- Project status and schedule;
- A description of the produced advanced energy property and how the project qualifies for the credit
- Detailed information on the project, including financial plans, business plans, intellectual property arrangements, and information on confirmed or potential customers.
- An extensive project timeline.
- A description of the qualifying project's future impact in terms of energy produced from renewable resources, energy conservation, increases in fuel efficiency, reduction of emissions, sequestration of greenhouse gases, processing of renewable fuels, and storage and transmission of renewable energy.
The final application must also include detailed technical information on the project in order for the DOE to assess the project's commercial viability, environmental impact, and potential for job creation and for technical innovation. The guidance sets forth detailed requirements, including several technical calculations that applicants will need to perform and worksheets that must be completed with project data. The submission of this technical data will permit the DOE to equitably review applications in order to recommend and rank the applications for the Service's allocation of the tax credits.
Criteria Considered by the DOE
To rank applications, the DOE will consider the following criteria:
1. Eligibility Criteria:
- Does the project qualify as an advanced energy project?
- Is the project commercially viable?
2. Evaluation Criteria:
- Domestic Job Creation (direct and indirect)
- Environmental Impact (in terms of avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases)
- Potential for Technological Innovation and Commercial Deployment (production of new or improved technology, creation of cost savings and value)
- Project timeframe (shorter timeframes referenced)
3. Policy Factors:
- Geographic Diversity
- Technology Diversity
- Project Size Diversity
- Regional Economic Development
While the Notice indicates that each evaluation criterion will be equally weighted, it does not discusshow the DOE will apply the policy factors.
Application Procedure After DOE Review
Although an application to the Service is required under the guidance, the Service will only consider a project if the DOE recommends and ranks the project to the Service. Therefore, the application to the Service is little more than a formality to ensure that a project is considered for the tax credit program.
- Plan Carefully for the Project Before Submitting the Application Because Changes May Jeopardize Credit Eligibility. Taxpayers may not significantly change the project after submitting their application to the DOE. A significant change is vaguely defined as "any change that a reasonable person would conclude might have influenced DOE in recommending or ranking the project or the Service in accepting the project application had they known about the change when they were considering the application." This creates uncertainty for taxpayers when a change may be necessary to the project. Accordingly, important project details must be addressed soon -- before the final application is submitted. This means that tough business decisions must be made earlier than the taxpayers would ordinarily make such decisions for the project.
- Tax Planning Structures. Taxpayers should consult their advisors to ensure that the appropriate legal structure is in place to take advantage of the tax credit. For example, a partnership, leasing structure, or other structure may be appropriate to take advantage of the credit; since the credit is subject to the "at-risk" rules found in Section 49 of the Code, a C corporation investor may be required to monetize the credit.. While tax planning opportunities may be available once a credit is awarded, projects with investors in place should be making important tax planning decisions early on in the project process.
- Time is of the Essence. The tax credit program imposes several tight deadlines that must be met. Applicants should not count on another round of applications -- the full tax credit appropriation may be entirely utilized by the first round;
- Details are Important. The guidelines establish very detailed requirements for the applications, right down to the font size and page margins used for the DOE application. In order to assure that their projects are properly considered for the tax credit program, eligible taxpayers should submit complete applications that completely conform to all requirements.
Note: The Deadline Summary section of this publication was updated to reflect new interpretations from the DOE.