The Treasury message [PDF 98 KB] (undated, but posted March 4, 2013) outlines:
- How large the sequester-related grant reductions will be
- To which grants the reductions will apply
In section 1603 of the American Recovery and Reinvestment Act of 2009, Congress enacted the “1603 cash grant program” for certain renewable energy projects.
Under the program, projects that otherwise qualified for the Code section 45 production tax credit (PTC) or the Code section 48 investment tax credit (ITC) could elect to receive a cash payment from the Treasury Department in lieu of claiming tax credits on the federal income tax return.
Since inception of the program, Treasury has paid out more than $16 billion in cash grants, and there are many more grandfathered grant projects that will be entitled to payments before the program fully sunsets at the end of 2016.
As previously reported—see TaxNewsFlash-United States (September 20, 2012)—the White House indicated in a 2012 release that the mandatory budget cuts imposed by the sequester law would apply to 1603 cash grant payments.
In the September 2012 document released by the Administration, the expected sequester reduction to cash grants was expected to be 7.6% of the amount to which applicants were otherwise entitled. In the interim, Treasury repeatedly declined requests from taxpayers and practitioners to elaborate on how the sequester would be applied and to which cash grants specifically.
Treasury release (March 4)
In the March 4 Treasury message, many of the outstanding questions have been answered.
Specifically, the March 4 release states that the sequester amount for cash grants will be 8.7% of the allowable amount, and that this reduction will apply to all awards made on or after March 1, 2013, and throughout the fiscal year ending September 30, 2013.
It is expected that similar rules would be applied to payments made in fiscal year 2014 as well, assuming Congress does not change the sequester rules before then.
- Sequester percentage: The sequester percentage of 8.7% varies from the 7.6% previously estimated by the White House. This variance could be due to a number of factors including the temporary delay of the sequester (from January 2, 2013, to March 1, 2013). That delay requires Treasury to sequester the same budgetary amount, but in a shorter time period—thus the higher sequester percentage. The amount of the sequester for the fiscal year beginning October 1, 2014 was not released. Because the amount of budget savings for fiscal year 2014 will be spread across an entire 12-month period, the reduction for grant awards made in fiscal year 2014 may be lower than for grant awards made in fiscal year 2013.
- Timing of the sequester: The Treasury message states that the sequester applies to “awards” made on or after March 1, 2013. The notice defines an “award” as:
…the final decision by Treasury to pay a claim as evidenced by the “Section 1603 Award Letter” and effective the date of the letter.
This suggests that those taxpayers who received their Award Letter before March 1, 2013, would not be subject to a sequester grant haircut, regardless of when payment is received.
It is unclear how the sequester would apply to an applicant who, based on a dispute on eligible grant basis, received a grant reduction in their pre-March 1 Award Letter. When that applicant subsequently disputes the grant reduction and ultimately prevails in a restoration of the full grant amount after March 1, would that restoration amount be subject to the sequester? This scenario will almost certainly play out in the weeks and perhaps months to come.
- Basis reduction: One issue posed by the sequester of cash grants is to what extent grant recipients must reduce their tax basis in the underlying property. The grant rules generally require a basis reduction of 50% of the cash grant received. While the Treasury guidance does not specifically address this issue, IRS Notice 2012-11 provides in relevant part:
. . . the taxpayer's basis in the specified energy property is reduced by 50 percent of the payment. Section 48(d)(3) of the Code.
This suggests that applicants need to consider reducing their tax basis in cash grant assets by 50% of the amount actually received rather than 50% of the amount they would have otherwise been entitled to without regard to the sequester.
- Tax credit in lieu of cash grant in lieu of tax credit? For taxpayers who have not yet received their cash grants, there is always the option of withdrawing the grant application and reverting to claiming the underlying tax credit. The sequester does not apply to tax credits so taxpayers would be entitled to the full amount of the ITC or PTC. This could be an attractive option for those taxpayers in a tax position to currently fully utilize the tax credit.
- Timing of applications: The sequester raises an interesting question for cash grant applicants who intend to complete their projects later in 2013. There is some possibility that Congress could revoke the sequester either later in 2013 or in 2014. In the case of projects that are not yet in-service, applicants may consider whether they prefer to complete construction now and submit their applications in 2013 and receive 91.3% of their cash grants immediately or defer completion of construction of eligible projects in hopes of getting something greater later. Under the section 1603 program, final applications must be filed no later than 90 days after the “placed-in-service date” of the project.
For more information, contact a tax professional with KPMG’s Washington National Tax: