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What Will Be the Impact of Sequestration on Section 1603 of the American Recovery and Reinvestment Act?

The effects of the federal government “sequester” will take many months to figure out completely, but it is becoming increasingly clear that the results will be far-reaching and not necessarily fully anticipated.  For example, Chinese and European manufacturers of solar equipment intended for sale in the United States may be surprised to find out that federal government support for solar projects has taken an unexpected hit.

We have previously written about Section 1603 of the American Recovery and Reinvestment Act (ARRA), which offered certain owners of renewable energy projects, including photovoltaic solar, the opportunity to receive a cash grant in lieu of the usual 30% investment tax credit for such projects. The grant has been a very attractive option for taxpayers that have no or limited taxable income, and that accordingly could not use or would need many years to use up the full amount of the credit.

Those who applied for grants under Section 1603 have now received an unpleasant surprise, due to the federal government’s “sequester” of spending. The United States Department of the Treasury announced earlier this week that every Section 1603 award made between March 1, 2013, and the end of the federal government’s current fiscal year (September 30, 2013) will be reduced by 8.7%. A copy of the announcement is available here.

Depending on how the sequester is applied in the next fiscal year, awards paid after September 30, 2013, may be subject to a different percentage reduction.

The announcement does not appear to affect the amount of the investment tax credit, which remains at 30%. However, many entities installing solar projects, such as state and local governmental bodies, do not pay federal income tax and are not able to use the tax credit.