Thursday, August 25, 2011
Time is Running Out on the Section 1603 Tax Grant Program for Renewable Energy Projects
In December 2010, the Department of Treasury Section 1603 tax grant program (“1603 Grant”) was extended through 2011. The 1603 Grant offers renewable energy project developers cash payments in lieu of the investment tax credits (“ITC”). The values of the awards are equivalent to 30% of the project’s total eligible cost basis in most cases. Qualifying technologies include: biomass; combined heat and power; fuel cells; geothermal; incremental hydropower; landfill gas; marine hydrokinetic; microturbine; municipal solid waste; solar and wind.
Another extension is not likely and so developers intending to take advantage of the 1603 Grant should be aware that construction must begin before 2012, i.e., developers must begin construction by December 31, 2011. Developers must further file an application with Treasury no later than September 30, 2012, whether or not placed in service. The purpose of submitting an application for a property that is not yet placed in service and will not be placed in service in 2011, is to demonstrate that construction has begun during the required time period in 2011.
One common source of confusion is how to meet the construction test. The Department of Treasury has provided guidance (http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx) to use to determine whether construction has begun. There are two ways to qualify: (1) “physical work of significant nature;” and (2) 5% safe harbor. The safe harbor provision sets the beginning of construction at the point where the applicant has incurred or paid at least 5% of the total cost of the property, excluding land and certain preliminary planning activities. While primarily an expenditure test, there are a number of pitfalls in satisfying the 5% safe harbor provision and developers should consult the Treasury or counsel to make sure that the test is satisfied.
It is important to note that even though time is running out on the 1603 Grant, developers still have time to take advantage if they can meet the construction test before December 31, 2011.