On June 25, 2010 The U.S. Treasury Department issued additional information regarding the begin construction portion of the grant application. There has been confusion regarding the two options of the begin construction requirement. This pronouncement addresses both situations and helps to clarify questions regarding the physical work of a significant nature and the 5% safe harbor eligibility requirements. Some of the details discussed relate to determining what activities qualify the applicant, how contracts with suppliers and manufacturers are handled, timing and continuity of projects, and finally application and documentation guidelines.
The first matter to be discussed is what constitutes physical work of a significant nature?
- Physical work of a significant nature consists of any work done at the specified energy site, also any work done under a binding written contract for the manufacture, construction, or production of specified energy property. This may only represent a small part of the facility.
- Once physical work has begun the work must be continuous. The treasury department will closely scrutinize projects with respect to continuity. They will however be sensitive to seasonality issues, and other issues beyond the applicants control that may prevent continuous work from being done.
- Constructing roads on the specified energy site may only be considered physical work if the roads are integral to the site. Such as roads used to move materials, and allow equipment to operate qualify. Roads to allow access to the site or for employee or visitor vehicles do not qualify.
- Preliminary work on the specified energy site such as clearing trees, obtaining permits, and erecting fences do not qualify as significant work because such activities are not integral to energy production. Additionally removing existing facilities from the property does not qualify. Also included in preliminary work is test drilling of potential geothermal deposits.
- Beginning construction on a building that will be used as maintenance or operations building generally does not qualify. However there are two exceptions to this rule. First if the structure is essentially an item of machinery or equipment, secondly if the structure houses property that is used as an integral part of qualified energy production, and can be expected to be replaced when the equipment is replaced.
- Contracts for these projects are binding when the contract is considered enforceable under state law; also damages in the event of a breach cannot be less than 5% of the total contract price. Work performed under a contract consists only of physical work that is taking place after the contract date on specified energy property. The contractor must be able to demonstrate that that work has been started and that the project will become property of the applicant. Purchasing of inventory, or producing inventory that is usually held in a manufacturer’s inventory under contractual obligation does not qualify as physical work of a significant nature.
- The site of the project does not need to be clarified prior to the deadline for application as long as significant work has begun on the project.
The second point relates to what requirements must be met for 5% safe harbor eligibility?
- An applicant meets the 5% safe harbor requirement when they pay or incur at least 5% of the total cost of the specified energy project, depending on the accounting method chosen cash or accrual, in 2009 or 2010. Cash basis tax payers must pay the amount, and accrual basis tax payers must incur and prove that 1) the liability is fixed 2) the amount is reasonably determinable and 3) the economic performance tests have been met relating to the costs.
- Applicants may not need to incur the costs themselves if they are relying on a supplier to produce items integral to the specified energy project. The applicant and supplier must be under a binding contract for this to be true.
- Costs incurred by a supplier of the applicant under a binding contract are considered costs of the applicant as the costs are incurred by the supplier. If the supplier uses subcontractors to manufacture components the applicant may only incur costs as they are incurred by the supplier, not as they are incurred by the subcontractor.
- If title of property for the project has passed from the manufacturer or supplier to the applicant but the property is still being stored by the manufacturer or supplier the property is still considered to be provided to the applicant. It is also considered provided to the applicant when the property is physically delivered to the applicant.
- If a developer has entered into a large contract and met the safe harbor rules for that contract in 2009 or 2010 portions of the project can be divested to smaller investors or LLC’s and still be eligible for application.
- If the safe harbor requirement is met based on the estimated total project costs and the actual total project costs are greater than expected the applicant is disqualified from grant eligibility. However the applicant may still be eligible for a portion of the grant if they apply for a payment based on a portion of the project that falls within their estimated project costs.
- If an applicant meets the safe harbor requirements during 2009 or 2010 but the project is not yet completed in 2009 or 2010 they do not need to continue to work at the site to remain eligible for the grant.
The final points clarified relate to the application process for the grant.
- All applicants are required to meet the application date of October 1, 2011.
- For property being placed in service during 2009 or 2010 they applicant does not need to provide proof that construction has begun.
- For applicants whose projects will be placed in service between January 1, 2011 and October 1, 2011 they must submit only one application proving that the project began in 2009 or 2010, and that the project is in service.
- For projects that will be put in service after October 1, 2011, the applicant must submit a preliminary application proving the project began in 2009 or 2010, and then also a supplementary application at the time that the projects are placed in service
- Applicants that have not placed the project into service will be notified whether or not they have met the physical work of a significant nature, and or the safe harbor requirement.
- The application requires that specific documentation be provided to ensure eligibility for the grant
- For those applicants relying on the physical work or a significant nature, physical work must be documented. Submitting a signed written report from the project engineer detailing the projects eligibility, construction schedule, estimated budget, and invoices and descriptions of work that has already commenced.
- Safe harbor applicants must submit a signed statement from an authorized representative detailing the costs that were incurred or paid. Projects with budgets in excess of 1 million dollars must have a statement from an independent accountant.