With the approaching expiration of the Section 1603 cash grant program, renewable energy developers are scrambling to begin construction of grant-eligible equipment by the end of the year. Assuming they can satisfy the 2011 construction requirements, this grandfathered equipment can be incorporated into one or more of their future energy projects, thus enabling otherwise ineligible projects to receive cash grant proceeds.
A reading of the Section 1603 program guidance from the U.S. Treasury Department reveals several techniques for maximizing the availability of grant-eligible equipment. It also underscores the importance of careful planning to avoid any unwelcome surprises.
Overview of the Cash Grant Program
The Section 1603 cash grant program was enacted in 2009 to encourage investments in solar, wind, and other non-traditional energy projects. For qualifying projects, Treasury will provide a cash grant of either 10 percent or 30 percent of the basis of eligible energy property, depending on the type of property at issue. By receiving the cash grant, the grant applicant is electing to forgo investment and production tax credits with respect to the property. The Section 1603 grant proceeds are not subject to federal income tax.
Intended to temporarily fill the gap created by diminished investor demand for tax credits, the Section 1603 program is scheduled to expire at the end of 2011. After this year, only qualifying energy projects that began construction during 2009 – 2011 and are placed in service (meaning ready and available for their intended use) before the end of 2016 in the case of solar and certain geothermal projects, 2012 for wind, or 2013 for most other renewables, will be eligible for the grant.
Focus on Satisfying the 5% Safe Harbor
Section 1603 requires the grant applicant to begin construction of qualifying energy property prior to the end of 2011. The applicant must establish construction commencement by either beginning actual physical work on the property — which work must continue through project completion — or demonstrating that the applicant has paid or incurred more than five percent of the total cost of the property (5% Safe Harbor).
For projects past the planning stage, demonstrating actual physical work during 2011 may be the most attractive way to satisfy the construction condition, as it does not require 2011 costs to exceed a minimum threshold. However, for projects still on the drawing board, including those that are merely speculative, developers are better served satisfying the 5% Safe Harbor, as continuous construction is not required. In other words, as long as the 5% Safe Harbor is satisfied before 2012, developers may thereafter prudently and diligently pursue further development and construction of these projects, but without imminent deadlines other than the requirement to be placed in service by the relevant expiration date.
A developer can satisfy the 5% Safe Harbor by establishing that it has paid or incurred sufficient costs for grant-eligible property during 2011. Whether a taxpayer has paid or incurred an expense depends on method of accounting the taxpayer uses for tax purposes. For cash method taxpayers, the payment of an expense (for example, making a nonrefundable deposit) generally is sufficient to establish that such expense has been "paid." For accrual method taxpayers, mere payment of an expense generally is insufficient for the expense to have been "incurred." Rather, a cost is incurred for tax purposes when 1) the fact of the liability becomes fixed, 2) the amount of the liability is determinable with reasonable accuracy, and 3) economic performance has occurred.
For Section 1603 purposes, if property is being manufactured for the grant applicant by another person (such as a vendor) pursuant to a binding written contract, the costs of that property are treated as paid or incurred when the property is provided to the applicant. For periods before the property is provided to the applicant, the vendor’s costs that are paid or incurred to manufacture the property are deemed to be costs of the applicant that are paid or incurred at the time they are paid or incurred by the manufacturer. This means that the grant applicant may rely on the vendor’s costs to satisfy the 5% Safe Harbor.
Understand the Base Case
Before considering planning opportunities for maximizing the availability of grandfathered property, it is important to understand a base-case scenario from which all variations can then be evaluated. The following can be considered a standard method for a developer seeking to qualify one or more projects for the Section 1603 cash grant:
Consider Variations to the Base Case
While the base-case scenario represents a straightforward method of satisfying the 5% Safe Harbor and qualifying eligible projects for the cash grant, the Section 1603 program guidance allows for several variations that do not violate grant eligibility:
Get an Independent Accountant Involved Early
For projects with an estimated eligible cost basis of $1 million or more, a grant applicant must include with its application a statement from an independent accountant supporting, among other things, the applicant’s claim that the 5% Safe Harbor has been satisfied. Specifically, the statement must 1) attest to the method of accounting used by the applicant for federal tax purposes; 2) state the amount that has been paid or incurred before the end of 2011; 3) provide a detailed description of the costs that have been paid or incurred; and 4) provide an estimate of the total cost of the specified energy property. If an applicant is relying on costs paid or incurred by a vendor or other manufacturer, the grant application also must include a copy of the relevant binding written contract and a statement from such person, signed under penalties or perjury, of costs paid or incurred by such person and allocated to applicant’s project.
Requiring an independent accountant to certify the costs paid or incurred by the applicant during 2011 emphasizes the importance of getting the independent accountant involved as soon as possible. No developer trying to maximize its grant-eligible property should risk having the accountant disagree with the techniques relied upon by the developer after it is too late to change strategies.
Apply for the Grant
The Section 1603 program requires the applicant to submit a grant application no later than September 30, 2012. This deadline applies to all grant-eligible property, whether or not such property is placed in service by such date. If the property is expected to be placed in service on or after October 1, 2012, then the applicant has 90 days after the property is placed in service to provide Treasury with any supplemental information necessary to complete the application.
The grant application provides considerable flexibility for property not yet placed in service. For example, while the applicant must be identified and the project described, at least in general terms, the actual physical location of the project does not have to be settled. That said, to qualify for a cash grant, the developer would need to ensure that the project ultimately is placed in service in time to qualify for the grant.
The approaching expiration of the Section 1603 program underscores the importance of taking actions today to make available grandfathered equipment that can then be used to qualify future energy projects for the cash grant. A developer can begin construction of grant-eligible property in 2011 and assign such equipment to these future projects to enable them to satisfy the 5% Safe Harbor. While the Section 1603 program guidance allows for several planning opportunities to maximize the availability of grandfathered property, in all cases, eligibility depends on taking action before 2012.
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John A. Eliason
The author recently joined Foley's Washington, D.C. office. He is admitted to practice law only in New York and Texas. He practices in Foley's D.C. office under the supervision of a member of the D.C. Bar.