Download Section 1603 Payments Guidance for Final Months of Program

Section 1603 Payments
Guidance for Final Months of Program
Solar Wisconsin Fall Conference
October 25, 2011
Michael Allen
Section 1603 Program
• This program offers eligible applicants a
payment, in lieu of tax credits, for “specified
energy property” installed and used in trade
or business or for the production of income.
• For a solar energy system, the payment is
equal to 30% of its eligible cost basis.
• Applicants are eligible for payment after the
solar energy system is “placed in service”.
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Treasury Guidance Relevant to Making Most of
Final Months* of the 1603 Program
1. Guidance on how to demonstrate that
construction “has begun” in 2011.
– Unless system was placed in service in 2011, to qualify
for payment applicant must demonstrate that
construction began in 2011.
– Treasury refers to this guidance at the “Begun
Construction” guidance.
2. Guidance on evaluating cost basis for solar
photovoltaic properties.
*There has been discussion about extending the Section 1603 Program, but nothing is
assured at this point in time.
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Two Ways to Qualify under “Begun
Construction” Guidance
• Begin physical work of a
significant nature in 2011; or
• Meet five percent (5%) safe
harbor test.
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Physical Work of a Significant Nature
• This means that physical work on the
“specified energy property”, i.e., the solar
energy system, has started. It includes:
– Physical work at the installation site.
– Physical work under a binding written contract for
the manufacture, construction or production of
the solar energy system, if the contract is entered
into prior to the work taking place.
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Work that Does Not Qualify
• Work on transmission lines or roads (but
might include work on a transformer). Has to
be on property integral to the production of
electricity.
• Preliminary work such as clearing land,
obtaining permits or putting up fencing.
• Removing an existing facility to make room for
the new facility.
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Reasonable Follow Up Questions
• How much physical work is required? In
general any work on site qualifies.
– Example given is laying foundation for one wind
turbine within a larger wind farm.
• Once begun, must work be continuous?
– Continuous is best. Treasury will scrutinize work
that is not continuous.
– Disruptions beyond the applicant’s control will be
taken into account.
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What is a “Binding Written Contract”?
• Contract must be enforceable (i.e. no outs),
with at least five percent (5%) of the total
contract price at risk if it is breached.
• Can’t cover work done before the contract
was entered into.
• Contract to buy components or parts in
vendor’s existing (i.e. pre-contract) inventory
will not qualify.
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Five Percent Safe Harbor Test
• Applicant must pay or incur five percent or more
of the total cost of the specified energy property
before end of 2011.
• Whether a cost is “incurred” for an accrualmethod taxpayer is determined using test under
previous Treasury Regulations.
• Trap for the unwary. If the project cost increases,
so that what seemed like five percent in 2011 is
less than five percent when all costs are known.
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Evaluating Cost Basis for
Solar PV Properties
• Recent Guidance by Treasury indicates that:
– Treasury will evaluate reasonableness of
applications for Section 1603 Payments for Solar
PV Properties against cost benchmarks.
– Projects whose costs per watt exceed Treasury
cost benchmarks will receive closer scrutiny.
– Projects between related parties (e.g. Developer ,
Supplier or Installer related to Owner/Applicant)
will also receive closer scrutiny.
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Cost Benchmarks
Residential
Residential/Small
Commercial
Commercial
Large
Commercial/
Utility
Size Range
<10kW
10 – 100 kW
100-1000kW
>1 MW
Typical Size
5 kW
25 kW
250 kW
2 MW
+/-$6
+/- $5
+/- $4
Turnkey Price +/- $7
per Watt
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Related Party Transactions
• Treasury will take close look as to whether the
transaction is conducted at fair market value.
• Treasury has been doing this for some time
now and reducing Section 1603 Payments
below applied for amounts.
• Guidance reviews multiple methods that
Treasury employs for making valuation
determinations.
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