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U.S. Department of Treasury Guidance Update to Section 1603 Program—Payments for Specified Energy Property in Lieu of Tax Credits—of the American Recovery and Reinvestment Act

April 7, 2010

The United States Department of the Treasury recently clarified policy related to section 1603 of the American Recovery and Reinvestment Act (ARRA). Section 1603 of ARRA, which was detailed in a February 16, 2009 Dykema Government Policy Alert (Summary of Energy Provisions in the American Recovery and Reinvestment Act), authorized cash grants in lieu of production tax credits for electricity produced by certain renewable energy facilities and investment tax credits for certain renewable energy property. As explained further below, the cash grants are available only for projects initiated during 2010, a date that may be extended by pending legislation.

The new section 1603 guidance clarifies that owners of qualified energy property are eligible to receive the cash grant if the energy property is leased to a tax-exempt entity, such as a hospital or local government, if the lease is a true lease and not a disguised sale. This is a change in policy from implementation of the production and investment tax credits where owners cannot receive the credits if property is leased to an ineligible or tax-exempt entity.

Prior to this guidance, the consensus among practitioners was that it was necessary to enter into a Power Purchase Agreement (PPA) to obtain energy tax benefits, including cash grants, when dealing with a tax-exempt organization. The additional overhead and costs associated with establishing and maintaining a PPA can affect the economics of a transaction, so the new Treasury guidance may well create new opportunities for hospitals, universities, municipalities, and many other tax-exempt entities to benefit from renewable energy installations.

While the new guidance appears in a document published by the Treasury Department on its Web site, the facts and circumstances of each lease transaction are important in determining its final tax consequences. Interested parties are encouraged to consult a qualified tax advisor or seek a private letter ruling from the IRS.

Pursuant to section 1603, facilities must be placed in service by December 31, 2010, or 5 percent of the total project cost must be spent by that time and the facility must be placed in service by the credit termination date. Grant applications will currently be accepted until October 1, 2011.

Pending Legislation Related to the Section 1603 Cash Grant Program

Since enactment of ARRA last year, several pieces of legislation have been introduced related to the Section 1603 Cash Grant Program—two to extend it and one to suspend it indefinitely.

  • S. 2899 would extend the cash grant program until 2012.
  • H.R. 4599 would enable taxpayers to elect to receive the payment either as a cash grant or a tax credit until 2013.
  • S. 3069 would suspend the program indefinitely until it can be changed legislatively to prevent funds from being spent overseas.

For more information, please contact Jeff Dalebroux, member, at 312-627-2136 or Mary Beth McGowan, government policy advisor, at 202-906-8631.


As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2010 Dykema Gossett PLLC. 

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2017 Dykema Gossett PLLC.