Section 1603 Payments Guidance for Final Months of Program

1. Section 1603 PaymentsGuidance for Final Months of Program Solar Wisconsin Fall Conference October 25, 2011 Michael Allen

2. 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”.

3. Treasury Guidance Relevant to Making Most of Final Months* of the 1603 Program • 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. • 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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 accrual-method 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.

10. 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.

11. Cost Benchmarks

12. 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.