To Meet Treasury Grant Deadline, Order Components Now
How to qualify for the Cash Grant program.
By William P. Ewing, Barnes & Thornburg LLP
Published: August 9, 2011
Time is running out for getting solar projects under construction in order to qualify for the 30 percent cash grant from the Treasury Department. Under the Cash Grant program, the Treasury will make a cash payment equal to 30 percent of the cost of certain solar property placed in service by the end of 2016. To meet the deadline, a developer must begin construction of the solar project no later than December 31, 2011. This article summarizes methods for satisfying the “beginning of construction” requirement.
There are two ways to show that construction has begun:
1. Actual physical work of a significant nature begins by the end of 2011 (the “Physical Work Test”). Or,
2. Satisfaction of a safe harbor by paying or incurring more than 5 percent of the total cost of the solar project by the end of 2011 (the “5 percent Safe Harbor”).
The Physical Work Test is inherently factual in determining what constitutes work of significant nature, but the 5 percent Safe Harbor provides a bright-line mathematical test. The 5 percent Safe Harbor will generally be easier to prove than the more subjective analysis of what constitutes actual physical work of a significant nature. A developer does not have to satisfy both the Physical Work Test and the 5 percent Safe Harbor test ― either is sufficient. Nonetheless, we recommend trying to satisfy both tests (to the extent possible) as additional insurance in case an issue subsequently arises with the 5 percent Safe Harbor, such as a cost overrun.
Under either method, if the developer uses third parties to perform work, the work must be performed pursuant to a “binding written contract” entered into prior to work beginning. The contract must be enforceable under state law, and its terms cannot limit damages in the event of a breach to less than 5 percent of the total contract price. It is very important to have legal counsel review any third-party contract in order to make sure it constitutes a binding written contract.
Physical Work Test
Physical work of a significant nature includes any physical work on the specified property, such as installation of solar panels. Once construction starts, work must be continuous. Treasury wants to prevent the situation where a developer starts some construction activity in 2011 in order to qualify for the grant and then waits until 2015 in order to complete the project.
Physical work of a significant nature does not include preliminary activities such as planning and designing, clearing land, obtaining permits or, putting up fencing.
Excavation and pouring of concrete are included.
In addition, the Physical Work Test includes any physical work off-site that has taken place under a “binding written contract” for the manufacture, construction or production of the solar property for use at the facility.
For example, if a contractor is manufacturing solar panels specifically for a developer under a binding written contract, any physical work on those panels is physical work of a significant nature (provided that the contractor begins manufacturing the panels after the contract is entered into). If the contract is with a contractor who is manufacturing solar panels for several customers, the contractor must be able to reasonably demonstrate that the physical work has started on panels that will be sold to the applicable developer. The contractor may use any reasonable, consistent method to allocate work it performs among its customers.
However, work performed under a contract does not include work to produce components or parts that are in existing inventory or normally held in inventory by a manufacturer. Treasury has indicated that this rule essentially creates a presumption that off-the-shelf property cannot be taken into account unless it can be demonstrated that the work actually occurred after the binding written contract was entered into.
5 Percent Safe Harbor
A developer may satisfy the 5 percent Safe Harbor when the developer incurs (in the case of an accrual taxpayer) or pays (in the case of a cash basis taxpayer) more than 5 percent of the total cost of the property. Most taxpayers will be accrual taxpayers. Under general rules when property is manufactured by a third party for the developer, the developer will have incurred the costs when the liability is fixed and economic performance has occurred, which occurs when the solar property has been delivered to the developer.
However, there is a special 3.5 month exception. If the developer receives the solar property within 3.5 months after the date of payment, then the property will be treated as being delivered on the payment date. For example, if a developer makes payment for solar panels on December 31, 2011, then the cost of the solar panels will be treated as being incurred during 2011 if the panels are delivered to the developer no later than March 15, 2012. Another special exception allows incurring costs before the solar property is delivered to the developer. Before delivery, Treasury allows a developer to include the costs incurred by a manufacturer in supplying the solar property to the developer (again, this requires a prior written binding contract). For example, in 2011, a developer enters into a binding written contract with a manufacturer to provide solar panels. In 2011, the solar manufacturer incurs costs in producing the panels for the developer. The solar panels are delivered to developer after 2011. For purposes of determining whether the developer satisfied the 5 percent Safe Harbor, the developer may include the costs incurred by the manufacturer in 2011. The developer may rely on a statement by the manufacturer as the amount incurred by the manufacturer with respect to the panels produced under the binding written contract.
The primary risk with the 5 percent Safe Harbor occurs if the total project costs exceed original cost estimate. In order to satisfy the 5 percent Safe Harbor, an applicant must prove that the costs paid or incurred before the end of 2011 are equal to or greater than 5 percent of the total actual costs of the project when it is placed in service. Most developers will build in a cushion to minimize any risk of a cost overrun. Even if a developer falls outside the 5 percent Safe Harbor, the developer may still rely on the Physical Work Test as a back-up if there has been continuous construction of a significant nature that started before the end 2011.
Time is quickly running out for getting solar projects under construction. Make sure your project will satisfy the beginning of construction requirement before the end of 2011 in order to qualify for the Cash Grant.
© Barnes & Thornburg LLP 2011 – All Rights Reserved.
Photo courtesy of “Visvadas”.