Government Extends ARRA ITC Provision to Include Grants

In what may be the best news the solar energy industry (and the renewable energy industry as a whole) has gotten since the passage of the American Recovery and Reinvestment Act of 2009 (ARRA, which expanded tax incentives for the renewable energy sector and removed a former cap), the government today set new guidelines that allows firms with no tax appetite to collect cash-back grants in lieu of an investment tax credit (ITC).

The ITC, under Section 48, allows businesses and individuals to take a one-time, upfront tax credit equal to 30 percent of the investment in solar energy, wind energy and certain other types of renewables (the latter two extensions of previous ITC guidelines, which were originally limited to solar). The ITC only applies to qualified facilities placed in service after December 31, 2008, and before Dec. 31, 2013.

The PTC, under Section 45, allows renewable energy businesses to take an income tax credit, over 10 years, for energy generated, commonly at a rate of 2.1 cents per kilowatt hour (or 1.0 cent per kilowatt hour for landfill gas, incremental hydropower, and small irrigation systems, for example).

Clearly, in most instances, the ITC is now preferable to the PTC in terms of immediate financial benefit, according to Travis Blais, a tax lawyer for Mintz Levin and a member of their Energy and Clean Technology Practice division.

To understand where the grants come in, and why they are important, one needs to understand tax appetite, which Blais explains is simply a way of restating a tax liability which firms offset by taking advantage of ITCs.

But what about those start-up firms who, because of newness or funding status, don’t have a tax appetite (as is now the case not only with many renewable energy startups using accelerated depreciated schedules, but even some venture capital firms)?

This is where the new grant guidelines come in. That is, projects which would otherwise be eligible for the ITC (including PTC projects which could elect an ITC), but lack a tax liability against which to offset such credit, may apply for cash grants equal to the value of the ITC, without the need for tax-equity financing (or outside investment), and without having to wait to claim the credit on a tax return when tax liabilities are finally generated.

Renewable energy developers are elated, especially those with projects already in the pipeline. Five thousand renewable energy facilities are expected to benefit from the grants, which should total about $3 billion, according to Forbes.

Blais agrees, and says that the grants will open up a bottleneck created by firms with no tax appetite, particularly given the current economic situation, where even some banks don’t have a positive tax appetite. In such a climate, Blais notes, there are no ITC takers.

As Blais pointed out, the value of the grants – which closely track the ITC in terms of eligibility and benefit amounts, and even deadlines – is, at least from a tax lawyer standpoint, a way of making the ITC refundable for a temporary period.

Projects that meet all the qualifications, including putting the facilities into service, will receive a grant within 60 days of approval, Blais says, emphasizing the U.S. Department of the Treasury determination that such grants are only applicable to finished property, not for projects in the planning stage.

As Blais notes, however, developers need to finance properties hoping they will get a grant at the end. Thus, the whole matter of financing devolves on what type of comfort banks will find in a project that may or may not be eligible for such grants at the end. According to Blais, the Treasury has already emphasized that they will not issue “comfort letters.

Blais sees this issue being resolved by experience, but adds that the situation is also a distinct disadvantage to early movers.

It might also be resolved by banks getting some advice from people like me,Blais noted with a chuckle. Though this might be wishful thinking on my part.