The Section 1603 Treasury Grants, created in the American Recovery and Reinvestment Act of 2009, were extended for 2011 through last minute negotiations of the Tax Relief, Unemployment Insurance Reauthorization, and Job Relief Act of 2010. In short, they allow taxpayers eligible to receive the Section 48 Investment Tax Credit for renewable energy projects (with some limitations) to elect to take the amount of the tax credit as a cash grant. This has obvious advantages, including money in your pocket independent of profits and providing a realizable benefit to taxpayers who are unable to take advantage of the full tax credit.
The program expires on December 31, 2011. This means that in order to be eligible for the grant, a project must either: (1) be placed in service this calendar year or (2) be under construction this calendar year and placed in service prior to a date that varies by the type of project (large wind projects by the end of 2012, most others by the end of 2013 and some by the end of 2016). Obviously, placing a project in service by the end of the year is a relatively certain threshold, but the ambiguity arises in whether construction has begun.
The U.S. Treasury has clarified that construction has begun if “physical work of a significant nature begins.” The Treasury has created a safe harbor and specified physical work of a significant nature has begun if 5% or more of the total cost of the eligible property has been paid (if a cash-method taxpayer) or incurred (if an accrual-method taxpayer) by year-end. Cash-method taxpayers have a straightforward standard: pay out the money and count the costs. On the other hand, accrual-method taxpayers have more complicated standards and cannot simply prepay costs and count them as incurred at the time of payment.
The general rule is that a cost is treated as incurred by an accrual-method taxpayer once the property is provided to the taxpayer. In other words, if the taxpayer will physically possess property by year-end, the determinable cost of which amounts to 5% or more of the total cost of the eligible property, then the safe harbor is satisfied. The program has some helpful exceptions to this general rule.
First, if a taxpayer has entered into a binding written contract with another for purposes of the project, the taxpayer can treat costs paid or incurred by that contractor and allocable to its work for the project, as incurred by the taxpayer at that time. For example, a taxpayer contracts with a manufacturer of wind turbine towers and the contractor incurs costs during this year allocable to producing those towers specific to the taxpayer’s project. Even if the contractor does not deliver those towers to the taxpayer by the end of the year, those costs can be counted as incurred for the project in this year. The other helpful exception is that amounts paid out by an accrual-method taxpayer for property it reasonably expects to receive within 3.5 months of the date of payment will be considered incurred as of the date of payment.
The five percent safe harbor is a strict standard – there is no leeway for a taxpayer whose project ends up costing more than was reasonably expected as of the end of 2011, and, as a result, pushes total costs incurred through 2011 below the five percent threshold. Therefore, potential applicants would be wise to incur costs in excess of five percent of the budget to avoid losing out on the grant due to unexpected project costs.
With only five months left in 2011, qualifying for the Section 1603 Treasury Grant safe harbor requires planning that should be under way or beginning soon. Projects were scrambling last year to incur sufficient costs until the one-year extension came through on December 17, 2010. By beginning to plan your project now with the program requirements in mind, you can choose your contractors based on all relevant factors rather than only on how quickly they can incur costs and deliver.