Section 1603 Payments

Section 1603 Payments

May 31, 2012

Section 1603 payments to distributed solar companies remain somewhat unpredictable.

The Treasury is sensitive to the complaints and is trying to address them. It sent an email in March to solar companies that have filed or are expected to file at least another 50 applications for Treasury cash grants on solar installations with bases of more than $7 a watt.

The Treasury announced benchmarks in June 2011 for solar photovoltaic projects of roughly $7 a watt on residential installations of less than 10 kilowatts in size, around $6 a watt on installations of 10 to 100 kilowatts, around $5 a watt on installations of 100 kilowatts to 1 megawatt, and around $4 a watt on larger projects. These were benchmarks for solar equipment put into service during the first quarter of 2011. The Treasury said at the time that companies that claim “materially higher” tax bases can expect questions about their applications.

In the March email, the Treasury said it would focus on the average bases claimed for installations in each state. In states where the average basis is less than $7 a watt for rooftop residential systems, applications “will be processed without further upfront scrutiny as to costs as long as the claimed basis is supported by an appraisal with state-specific conclusions regarding the [fair market value] of such systems,” the email said. (Most residential systems are financed in a manner that allows a cash grant to be claimed on the fair market value of the systems rather than their cost.)

Many residential solar companies are reading the email to say that they will be paid the grants for which they apply, as long as the basis claimed is less than $7 a watt and the amount is supported by a credible appraisal. Ellen Neubauer, the cash grant program manager, confirmed that is what was intended.

However, the Treasury is warning companies that claim bases below $7 a watt to be careful that they can support the bases claimed because the IRS may audit later. The Treasury appears also to be moving to after-tax discounted cash flows as its preferred method for valuing solar rooftop installations.

In other developments, the Treasury is reassessing whether it will allow developer fees to be added to basis for cash grants. Most projects are owned by special-purpose project companies. It is not unusual for the project company to pay an affiliated company that has the employees who did the development work a fee at the end of construction. The fees can run as high as 15% or more of the project cost. They are taxable income to the affiliated company receiving such a fee. They normally add to basis in the project. The peculiar math of the renewable energy industry gives companies an incentive to pay them. The federal income tax on the fee is 35%. By adding them to basis, the project company can claim tax subsidies worth 56%. Developer fees have been paid historically in the independent power industry, even before there was a tax benefit for doing so.

Grant applications are taking more than 60 days currently to process. The Treasury has been flooded with rooftop solar applications.

The House Energy Committee sent a letter to the Treasury in early March challenging claims by the Obama administration that the section 1603 program has helped create jobs in the renewable energy industry and asking for lots of information as part of a potentially hostile investigation of the program. The Treasury responded to the letter on March 30. A copy of the response is posted to the committee website. The committee has not decided yet on next steps.

Keith Martin