Incurred costs under the 5% test for starting construction may have to be reduced by any credit or discount the developer is given against a future turbine or other equipment order, depending on the facts.

This is the upshot from a memo that was made public in January by the IRS national office to an IRS agent in the field. The memo is FAA 20180101F.

The memo discusses a fuel rewards program that a grocery chain offers customers. The grocery chain was under audit.

Certain products on store shelves are tagged to give rewards. A customer buying these products receives credit on a fuel rewards card that the customer can then redeem for gasoline at a participating service station. The customer puts the rewards card in the fuel pump. The pump meters out gasoline until the limit on the card is reached. The grocery chain pays participating service stations for the gasoline after subtracting a discount.

At issue in the audit is when the expected costs to buy the fuel accrue so that the grocery chain can deduct them.

The cost of a reward in the form of a discount against a future purchase does not accrue until the customer makes the actual purchase because there is no cost to the grocery chain unless the customer makes the other purchase.

By contrast, the cost of a reward where the customer is essentially given a receipt that allows him to pick up a product at another location accrues immediately. The IRS said the grocery chain bought fuel from a third party and has the customer pick it up at another location.

The memo is a reminder to developers counting costs under the 5% test to make sure the amounts being counted are for the equipment being purchased and not for something else.

Developers of wind, solar, geothermal, biomass, fuel cell and other projects face deadlines to start construction. One way to start construction is to incur at least 5% of the project cost before the deadline. Costs do not count before they accrue for tax purposes.