Notice 2009-52: Election of ITC in Lieu of PTC
By: ALEXANDRA L. MERTENS, THOMAS W. GARTON & DANIEL A. YARANO
June 9, 2009
On June 5, 2009, the IRS issued Notice 2009-52 (Notice). The Notice describes the procedures for a taxpayer to make the irrevocable election to utilize the Investment Tax Credit under Section 48 of the Internal Revenue Code (ITC) in lieu of the Production Tax Credit under Section 45 of the Code (PTC), with respect to qualified facilities placed into service after December 31, 2008. The election was authorized by the American Recovery and Reinvestment Act of 2009 (ARRA).
Background
The ARRA authorized the election of the ITC in lieu of the PTC for qualified facilities, including wind facilities placed into service in 2009 through 2012, and for closed-loop and open-loop biomass, geothermal deposits, landfill gas and municipal trash, hydroelectric dams, and marine and hydrokinetic power (including irrigation) placed into service in 2009 through 2013. The ITC provides the opportunity for owners of these facilities to elect a tax credit equal to 30% of the eligible facility’s qualifying costs.
Qualifying costs include the cost of property that is tangible personal property or other tangible property (not including a building or its structural components) for which depreciation (or amortization) is allowable, but only if the property is used as an integral part of the qualified facility. The Notice did not provide additional guidance regarding what property constitutes an “integral part” of a qualified facility. However, in the case of wind projects, the conference committee report on the ARRA states that the conferees intended only property subject to 5-year MACRS depreciation rules to be included in a wind facility’s qualifying costs.
The Election
Under Notice 2009-52, the taxpayer will make the election by completing and filing Form 3468 with its tax return in the year in which the qualified facility was placed into service. The taxpayer must make a separate election for each qualified facility. Notably, the Notice does not indicate how narrowly the IRS will define a qualified facility for the purposes of making this election, such as whether a qualified facility is a single wind turbine, or a wind project consisting of multiple turbines.
The taxpayer must attach a statement to the Form 3468 which includes:
- The taxpayers’ name, address, taxpayer ID number, and phone number;
- For each qualified investment credit facility: (a) a detailed technical description of the qualified facility, including generating capacity, (b) a detailed technical description of the energy property placed in service during the tax year as an integral part of the facility, including a statement that the property is an integral part of that facility, (c) the date that the energy property was placed into service, (d) an accounting of the taxpayer’s basis in the energy property, and (e) a depreciation schedule reflecting the taxpayer’s remaining basis in the energy property after the energy credit is claimed;
- A statement that the taxpayer has not and will not claim a grant under Section 1603 of the ARRA for property for which it is claiming the energy credit; and
- The following declaration signed by the taxpayer or a person then authorized to bind the taxpayer in such matters: “Under penalties of perjury, I declare that I have examined this statement, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this statement are true, correct, and complete.”
Documentation and Coordination with Grants
The Notice also requires the electing taxpayer to retain adequate books and record, including a copy of the statement described above, the Form 3468, and all supporting documentation relevant to the election. The purpose of the record retention is to allow the IRS to verify that the property for which the credit was claimed satisfies the applicable requirements and Notice 2009-52.
Finally, the Notice reconfirms the ARRA provision that if a Section 1603 grant is claimed with respect to any property, the PTC or ITC may not be claimed with respect to such property in the year that the grant is made or in any subsequent taxable year. However, the Notice does not provide additional guidance regarding the application for grants under Section 1603 of the ARRA. We expect the Treasury to provide further guidance on the application procedures for the cash grant in the coming weeks.
Deciding to Make the Election
The benefit of electing the ITC depends on the anticipated relative financial value of the ITC and PTC. Two important factors in this determination are the expected project costs and expected net capacity factor. Owners of projects with higher expected project costs relative to expected net capacity factor will be more likely to elect the ITC, whereas the owners of projects with high expected net capacity factor relative to expected project costs may continue to take advantage of the PTC. As an alternative to the ITC and the PTC, developers should also consider the temporary availability of the Section 1603 grant.
Other factors that may influence the choice of incentives include: (i) Performance risk. If a PTC project underperforms, then the taxpayer will not realize the amount of credit it anticipated and the ITC could have been a more beneficial choice. (ii) Tax credit appetite. A tax equity investor must have a sufficient tax liability to absorb the ITC in the initial year of operation or the PTC more slowly over the first 10 years of the project’s life. Developers should work with their tax equity partners to determine which tax credit can be used most efficiently. Alternatively, if the project elects to utilize the grant, the tax equity investor’s ability to utilize tax credits will be of minimal concern to the project. (iii) Liquidity. The ITC and grant require a 5-year holding period. If a project is sold within the first 5 years after being placed in service, the ITC and grant will be subject to recapture. In contrast, a PTC project can be sold at any point without penalty of recapture. If liquidity is a concern of developers and financiers, the PTC may be a more desirable choice for the project owners. (iv) Subsidized energy financing. The ARRA eliminated the haircut on projects that both claim the ITC and utilize certain subsidized energy financing, such as government-sponsored loan and grant programs. However it did not do the same for PTC projects. Developers who can benefit from subsidized energy financing should consider the impact of the reduced PTC that the project owners will be entitled to claim. (v) Power Sale. In order for a project to be PTC-eligible, the electricity generated by the project must be sold to an unrelated third-party. The ITC and grant do not have such requirement. If the project is ideal for behind-the-meter use, the PTC is not an option. (vi) Owner/Operator Requirement. The ITC provides additional flexibility by allowing the owner and the operator to be different entities, allowing a variety of financing structures that are not available to project owners claiming the PTC.
If you have questions about Notice 2009-52, the choice between the PTC, ITC and grant, or other energy-related provisions of the ARRA that are not described here, please contact Alex Mertens at 612.492.7297 or amertens@fredlaw.com, Dan Yarano at 612.492.7149 or dyarano@fredlaw.com, or Tom Garton at 612.492.7021 or tgarton@fredlaw.com.