The Internal Revenue Service recently issued additional guidance on Section 1603 of the American Recovery and Reinvestment Act, which provides a grant for certain renewable energy projects.
As part of the additional guidance, the IRS answered the following questions:
Q–1: What are the federal income tax consequences to a taxpayer who receives a Section 1603 payment? How does the receipt of a Section 1603 payment affect the basis of specified energy property?
Q–2: What are the federal income tax consequences to a taxpayer who receives a Section 1603 payment and a Department of Energy loan guarantee or an energy conservation subsidy from a public utility?
Q–3: If a partnership that is eligible to receive a Section 1603 payment has as a partner corporation that is a tax-exempt controlled entity (within the meaning of section 168(h)(6)(F)), does section 168(h)(6) apply for purposes of determining the partnership’s depreciation deductions?
Q–4: Under the Section 1603 program, the owner of multiple units of property that are located at the same site and that will be operated as a larger unit may elect to treat the units (and any property, such as a computer control system, that serves some or all such units) as a single unit of property for purposes of determining the beginning of construction and the date the property is placed in service. How will such a grouping election affect depreciation determinations for federal income tax purposes?
Q–5: If a project is sold and leased back more than three months after the seller/lessee originally placed the project in service, the seller/lessee is entitled to the Section 1603 payment. Must the seller/lessee report income equal to 50 percent of the amount of the Section 1603 payment ratably over the five-year recapture period?
Thus, if your project may be affected by the following issues, you should review the IRS’s recent notices.
- Income tax treatment of Section 1603 grant funds and their effect on the basis of qualified property;
- The effect of grant recipients also receiving a DOE loan guaranty or a subsidy from a public utility;
- The impact of a partnership having a tax-exempt controlled entity on the partnership’s depreciation deductions;
- The impact of electing to treat multiple units of property as a larger, single unit on depreciation determinations; and
- Implications of leasing property back beyond the 3-month period in a sale/lease-back transaction.
Read more about Section 1603 Grants on previous posts by AHC’s Energy Development Practice Group, including the following issues:
- Determining the basis of qualified property;
- Ineligible costs; and
- Scrutiny of Section 1603 applications by Treasury.