Seattle-based law firm Stoel Rives LLC, specializing in environmental issues, provided the following comments on the additional guidance that qualifies the term “begin construction.” The company says the clarification is necessary because, “There has been a great deal of confusion and discussion regarding what it means to ‘begin construction’. The law firm adds that the issues have become increasingly important as developers and investors work toward financing projects that will not be placed in service by the end of 2010.”
The firm adds that the U.S. Treasury Department recently released additional guidance on its website regarding the “begin construction” requirement for qualifying for the 30% ARRA cash grant. To qualify for the grant, a project must either be placed in service in 2009 or 2010 or, if construction begins on or before December 31, 2010, must be placed in service by a specified credit termination date (December 31, 2012 for large wind projects; December 31, 2013 forbiomass, certain geothermal and other projects; and December 31, 2016 for solar and other projects).
In July 2009, the Treasury Department issued guidance providing that the requirement could be satisfied either by beginning “physical work of a significant nature” in 2009 or 2010, or paying or incurring at least 5% of the total cost of the specified energy property before the end of 2010 (the “5% safe harbor”). In March 2010, the Treasury Department revised its published guidance to clarify a number of issues regarding the begin construction requirement. Today’s guidance, which was issued in the form of a list of questions and answers, is intended to provide clarification regarding a number of issues.
Some of the more interesting issues regarding “physical work of a significant nature” that are addressed in the guidance are:
- Any physical work on specified energy property will be treated as beginning construction, even if the work relates to only a small part of the facility.
- The Treasury Department will scrutinize long delays in construction activity that may indicate the lack of a continuous program of construction or contractual obligations to complete work within a reasonable time (other than delays beyond the control of the developer, such as weather).
- Starting construction of roads that are integral to the qualified facility may constitute physical work of a significant nature.
- Work performed under a contract does not include work to produce components or parts that are in existing inventory or are normally held in inventory by a manufacturer.
- Physical work of a significant nature can be considered to have begun even if a specific site for a project has not been identified at the time of the initial application.
Some of the issues regarding the 5% safe harbor that are addressed in the guidance include:
- A cost will not be considered “incurred” by an accrual-method taxpayer until “economic performance” has occurred. This generally requires that the property be provided to the applicant. Thus, amounts paid as prepayments or deposits by an accrual-method applicant generally will not count toward the 5% threshold.
- Property is considered “provided” to an applicant either when title passes to the applicant or when it is delivered to or accepted by the applicant. In addition, property that the applicant reasonably expects to be provided within 3 1/2 months of the end of 2010 will be considered incurred within 2010.
- The guidance clarifies a number of issues relating to how costs paid by a manufacturer on an applicant’s behalf pursuant to a binding written contract can be counted toward the 5% threshold.
- An applicant must pay or incur 5% of the total project costs to qualify for the safe harbor. If actual costs exceed estimates, the applicant will not qualify unless it has paid or incurred 5% of the actual costs. An applicant may, however, apply for the grant based on fewer than all of the units of a multi-unit facility if doing so causes the applicant to meet the 5% threshold.
The guidance also addresses procedural issues regarding the “begin construction” requirement:
- If a project is placed in service before October 1, 2011, only one application should be filed demonstrating both that construction began in 2009 or 2010 and that the project has been placed in service.
- If a project is placed in service after October 1, 2011, the applicant must submit a preliminary application by October 1, 2011 showing that construction began in 2009 or 2010. The preliminary application must be supplemented at the time the project is placed in service. The Treasury Department will confirm in writing that physical work of a significant nature has occurred or that qualifying costs have been incurred toward the 5% safe harbor, but will not confirm that other requirements have been met.
- The guidance explains what documents must be provided to establish either that physical work of a significant nature began in 2009 or 2010 or that the 5% safe harbor was satisfied.
Stoel Rives adds that much of the guidance confirmed what practitioners, developers, and investors have understood to be the rules since the original guidance was issued. Some of the clarification will provide reassurance to developers and investors