As published by the National Law Journal Online (http://www.nlj.com)
Two major stimulus packages spawned by the financial crisis have reshaped the federal policy landscape for renewable power. Most notably, qualifying solar, wind and other renewable energy-generation projects can choose either a 30% investment tax credit or a 30% cash grant in lieu of the ITC (the Treasury Grant Program). Wind and other nonsolar projects formerly eligible only for the production tax credit can for a limited time elect any of the PTC, the ITC or the Treasury cash grant.
To date, $2.7 billion of program grants have funded hundreds of renewable energy projects. Estimated 2010 total cash grants could approach $3.5 billion. However, the program is scheduled to expire at the end of this year. To qualify for the cash grant, projects must either be perational by the end of 2010 or else must “begin construction” by then and be operational by the end of 2012 for wind and by the end of 2016 for solar. This article focuses on meeting the year-end deadline.
The American Recovery and Reinvestment Act of 2009 created the Treasury Grant Program, which is designed to fund the cash benefit of a tax credit without regard to whether the taxpayer can actually claim the credits on its tax return. Applicants are eligible for the Treasury grant only if they commence construction on qualifying projects by Dec. 31, 2010, and complete construction by Dec. 31, 2012, for wind and by Dec. 31, 2016, for solar.
In July, the Treasury Department issued guidance as to when “construction begins” for renewable energy projects that may be eligible for a cash grant in lieu of an investment tax credit in the form of frequently asked questions. The guidance is important and timely because of the impending deadlines for the cash grant program. As the deadline nears, some project developers will attempt to “begin construction” this year of those projects that have a practical chance of crossing that threshold in 2010.
An applicant can demonstrate that construction has begun either by beginning physical work of a significant nature or by meeting a 5% safe harbor.
Beginning work of a significant nature means that physical work on the specified energy property has started. Physical work of a significant nature includes any physical work on the specified energy property at the site. The following do not qualify as “physical work of a significant nature”:
• Planning or designing, exploring, researching, clearing land, building fences, obtaining permits or securing financing.
• Preliminary work such as the cost associated with the removal of existing structures.
• Building roads for access to the site, or roads used solely for employee or visitor vehicles. However, roads that are integral to the qualified facility do constitute the beginning of construction.
• Test-drilling for a geothermal deposit.
• Construction of a building. However, the following structures are not treated as buildings for this purpose: a structure that is essentially an item of machinery or equipment, or a structure that houses property used as an integral part of a qualified activity if the use of the structure is so closely related to the use of the housed property that the structure clearly can be expected to be replaced when the property it initially houses is
Physical work of a significant nature includes physical work undertaken by third-party contractors under a binding written contract, which is enforceable under state law, for the manufacture, construction or production of specified energy property, provided the contract is entered into prior to the work taking place. Additionally, the contract terms cannot limit damages in the event of a breach to less than 5% of the total contract price.
Only the work that will become specified energy property for the applicant counts when work is performed by third-party contractors. Therefore, if a contractor is manufacturing solar panels specifically for the applicant under a binding written contract, any physical work on those panels is physical work of a significant nature on specified energy property of the applicant. If an applicant has a binding written contract with a contractor that is manufacturing solar panels for several different customers, physical work on the panels would be considered
work performed under the applicant’s binding written contract only if the contractor can reasonably demonstrate that physical work has started on panels that will become specified energy property of the applicant.
Purchasing components or other parts from the inventory of a vendor under a binding written contract does not count as work of a significant nature because these components are in existing inventory or are normally held by a manufacturer.
Applicants meet the 5% safe harbor only if they pay or incur 5% or more of the total cost of the specified energy property before the end of 2010.
“Paid or incurred” means costs are taken into account when cash-method taxpayers “pay” them and when accrual-method taxpayers “incur” them. The cost to acquire property is not generally “incurred” for tax purposes until the property is finally delivered or provided by the contractor to the purchaser. However, under an exception to that rule for purposes of the 5% safe harbor, for periods before the property is delivered to the purchaser, costs incurred by the contractor are treated as costs incurred by the purchaser when the costs are incurred by the contractor.
The Treasury grant applicant determines what costs have been incurred on its behalf by the contractor by relying on a written statement from the contractor as to the amount incurred by the contractor under the binding written contract. The contractor may use any reasonable, consistent method to allocate its costs among the units of property to be manufactured, constructed or produced by the contractor.
The exception that allows the applicant to take into account costs that are incurred by its contractor does not apply to costs incurred by a subcontractor. Thus, if components are manufactured for the contractor by a subcontractor, the cost of those components is incurred only when the components are provided to the contractor and not as the subcontractor pays or incurs the costs of manufacturing the components.
To satisfy the 5% safe harbor, applicants must demonstrate that costs paid or incurred before the end of 2010 are equal to or greater than 5% of the actual total costs of the specified energy property. If the applicant’s project includes multiple units of specified energy property, an applicant can apply for a grant based on some, but not all, units of property.
All applications for § 1603 grants must be submitted by the statutory deadline of Oct. 1, 2011. For property that has been or will be placed in service in 2009 or 2010, an application demonstrating that construction has begun is not required. For property that is placed in service after Dec. 31, 2010, but before Oct. 1, 2011, applicants need only submit a single application demonstrating both that construction began on the property in 2009 or 2010 and that the property has been placed in service. For property that is placed in service on or after Oct. 1, 2011, applicants must submit a preliminary application by Oct. 1, 2011, demonstrating that construction on the property began in 2009 or 2010. Such applications must then be supplemented at the time the property is placed in service.
For projects relying on “physical work of a significant nature,” applicants must document the physical work. Applicants should submit a written report from the project engineer or installer that describes the project’s eligibility and includes a detailed construction schedule, estimated budget for the project and a description of the work that has commenced. For projects with an anticipated cost basis of $1 million or more, the report must be from an independent engineer. When work is performed by contractors, the applicant must submit a copy of the binding written contract and a statement from the contractor describing the work that has commenced.
For projects relying on the 5% safe harbor, applicants must submit a statement from an authorized representative, or for projects with an estimated eligible cost basis of $1 million or more, from an independent accountant, that outlines the costs that have been paid or incurred before the end of 2010 including invoices and an estimate of the total cost of the specified energy property.