Treasury Department Issues Surprising New Guidance Allowing Cash Grants In Connection With Leases Of Renewable Energy Property To Tax-Exempt Entities

Author:Mr Arnold Grant, J. Ferd Convery III, Ruth N. Holzman, Ellen L. Bastier and Angelo Ciavarella
Profession:Reed Smith
 
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The Treasury Department recently issued additional guidance (the "Guidance") that permits the owner of renewable energy property to qualify for a cash grant under section 1603 of the American Recovery and Reinvestment Act of 2009 (the "Cash Grant"), even if the property is leased to a tax-exempt entity such as a hospital or a municipality. Prior to the issuance of the Guidance, it was widely believed that the Cash Grant would not be available for property leased to tax-exempt entities. As a result, renewable energy transactions with such entities have been structured as power purchase agreements ("PPAs"), and not as leases. Although a PPA remains preferable for tax purposes because of the availability of accelerated depreciation, a lease structure is now viable if a PPA is unattractive for other reasons.

Background

The renewable energy market relies on tax benefits to help generate competitive returns. The primary tax benefits currently available are (i) accelerated depreciation, and (ii) a Cash Grant generally equal to 30 percent of the cost of eligible property placed in service during 2009 or 2010, or by a later credit termination date if the property is not placed in service during 2009 or 2010, but if construction has begun during 2009 or 2010.

Eligible property generally includes equipment used in producing energy from wind, biomass, geothermal, small irrigation, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewables, as well as solar property, certain geothermal property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, small wind energy property, and geothermal heat pump property.

The Cash Grant is elective. Taxpayers who do not elect to receive the Cash Grant, or who do not qualify under the placed-in-service rules, can often qualify for either (i) the production tax credit (the "PTC"), which is principally used for wind, biomass, geothermal, small irrigation, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewables, or (ii) the investment tax credit (the "ITC"), which is principally used for solar property, certain geothermal property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, small wind energy property, and geothermal heat pump property. The ITC is generally available for qualifying property placed in service before January 1, 2017, and the PTC is generally available for qualifying...

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