Effective March 10, 2010, the Internal Revenue Service (IRS)
released Revenue Procedure 2010-20, which provides much
anticipated guidance for the electric utility industry on the tax
treatment of a Smart Grid Investment Grant (SGIG) made by the U.S.
Department of Energy (DOE) to corporations for qualifying
investments under the Smart Grid Investment Matching Program.
Background
In 2009, the American Recovery and Reinvestment Act included
significant funding for SGIGs and demonstration projects. Under
this program, known as the Smart Grid Investment Matching Grant
Program (42 U.S.C. 17386), the DOE is authorized to
provide grants up to 50 percent of qualifying smart grid
investments. However, a great deal of uncertainty existed as to
whether these DOE grants would constitute taxable income to the
recipients, which uncertainty was creating an adverse impact on
obtaining a matching grant from state regulatory commissions. Some
state regulatory commissions have already acted on the
understanding that the DOE grants would not constitute income.
Revenue Procedure 2010-20
This revenue procedure provides a safe harbor under which the
IRS will allow corporate recipients to treat the DOE grants as
non-shareholder contributions to capital
excluded from income under Section 118(a)
of the Internal Revenue Code. This safe harbor is available only if
the corporate recipient reduces the basis of the tangible property
by the amount of such grant. Because of the basis reduction, this
guidance permits only a deferral of income and not a permanent
exclusion from income with respect to SGIGs.
Unfortunately, the IRS took a narrow approach in this guidance
– it applies only to corporations receiving a SGIG from
the DOE under 42 U.S.C. 17386. This guidance does not apply to: (i)
non-corporate taxpayers or (ii) grants under a separate program for
smart grid technology research, development and demonstration
(under 42 U.S.C. 17384). Most electric industry participants have
been urging the Treasury Department to adopt a broader approach,
i.e., all DOE grants should be treated equally as non-taxable for
both corporate and non-corporate recipients.
Nonetheless, this IRS guidance does provide certainty as to the tax
treatment of SGIGs for corporate recipients, and this guidance is
consistent with existing law under Code Section 118(a) treating
these types of grants as non-taxable contributions to capital.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.