IRS Issues Notice Prohibiting "Double Dipping" of Energy Credits and Related Cash Grants

The IRS issued Notice 2014-39 clarifying that taxpayers that receive a cash grant in lieu of either a Code Section 45 production tax credit or a Code Section 48 investment tax credit may not claim one of the credits for any portion of the basis of the property, even when the cash grant was reduced due to sequestration.

Under the Code, production tax credits based on the amount of energy produced over a 10-year period are available for certain renewable energy generation, such as wind power. Other renewable energy property, such as solar generating equipment, is eligible for an investment tax credit equal to generally 30 percent of the cost basis of the energy property in the year such property is placed in service. In 2009, Congress permitted taxpayers to claim an investment tax credit in lieu of a production tax credit and created a new grant program, allowing applicants to elect to receive a cash grant from the U.S. Treasury Department, rather than the investment tax credit itself. Generally, if the cash grant was made with respect to energy property, no energy credit was available with respect to such property.

The cash grant program, which has generally expired, was particularly popular with developers because, unlike the investment tax credit, its value did not depend on the developer's tax position. However, cash bonus awards made on or after March 1, 2013 and before September 30, 2013 were subject to sequestration under Budget Control Act of 2011 at a rate of 8.7 percent of the cost basis of the property, and thereafter at a rate of 7.2 percent. Some taxpayers took the position that they were entitled to an energy credit to the extent that the cash bonus was reduced as a result of sequestration.

Thus, if the cost basis of the energy property placed in service in May 2013 was $100 million, then the taxpayer would receive a cash bonus of 30% of the cost basis after reduction by sequestration or $91.3 million, resulting in a cash grant of $27.3990 million, rather than $30 million. These taxpayers then claimed a 30 percent credit on the sequestered portion of the cost basis.

Under the Notice, the IRS makes it clear that taxpayers may not bifurcate their cost basis in energy property and claim a tax credit under sections 45 or 48 with respect to any part of the basis of property with respect to which they received a cash grant. However, the basis of the energy property is reduced by 50 percent of the amount of the actual cash grant received, and not by 50 percent of the full grant that would have been received but for sequestration.

See: Notice 2014-39.