Section 1603 of the American Recovery and Reinvestment Act of 2009 (“Section 1603”), enacted in February 2009, created a grant program applicable to new installations of certain energy property, including solar property. For purposes of Section 1603, solar property refers to equipment used to generate electricity, or provide heating, cooling or illumination, with certain exceptions, as described below. The grant program was due to expire at the end of 2010. Fortunately, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted in December 2010, extended the program through 2011.

The grant program is administered by the United States Department of Treasury (the “Treasury”). Section 1603 directs the Treasury to make grant payments to eligible persons or entities that place in service specified energy property and apply for such payments. The purpose of the grant payment is to reimburse applicants for a portion of the expense of such property, which is 30% in the case of solar projects.

Prior to the enactment of Section 1603, eligible taxpayers were only able to seek a federal business energy investment tax credit (“ITC”) pursuant to Sections 45 and 48 of the Internal Revenue Code (“IRC”). However, there has been a decreasing demand for tax credits as the economy has faltered and taxpayers have been unable to utilize tax credits due to tax losses. Section 1603 offers an attractive alternative as taxpayers can now receive a cash payment from the Treasury regardless of whether they have taxable income. The hope is that the “tax equity” market and investment in energy property will increase as a result.

Grant payments are made within 60 days of either the date of the grant application, or the date the property is placed into service, whichever is later.


Section 1603 requires that eligible applicants be the owner, or in certain cases, the lessee of the property, and must have originally placed the property in service. Federal, state and local government bodies, non-profit organizations (e.g., those organizations described in Section 501(c) of the IRC and exempt from taxation under 501(a) of the IRC), qualified energy tax credit bond lenders, and cooperative electric companies are not eligible to receive this grant. Partnerships or pass-thru entities with organizations described above as direct or indirect members are also not eligible to receive this grant, except in cases where the ineligible party only owns an indirect interest in the applicant through a taxable C corporation.


Grants are available with respect to: (a) eligible solar property (b) placed in service in 2009, 2010 or 2011, or placed in service by January 1, 2017, if construction began in 2009, 2010 or 2011. Thus, grants cannot be received with respect to projects where construction begins after December 31, 2011.

Eligible Solar Property

Section 1603 grant payments will only be made for solar property used in a trade or business, or held for the production of income. There are four types of eligible solar property:

  1. Equipment used to generate electricity;
  2. Equipmentused to heat or cool (or provide hot water for use in) a structure;
  3. Equipmentused to provide solar process heat (note though, that property used to generate energy for the purpose of heating a swimming pool is not eligible); and
  4. Equipmentthat uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.

Property used predominantly outside the United States does not qualify for a Section 1603 grant.

Placing Property in Service

To be eligible for a grant, eligible solar property must be: (i) placed in service during 2009, 2010 or 2011, regardless of when construction begins, or (ii) placed in service by January 1, 2017 (the specified credit termination date for solar property) if construction begins during 2009, 2010 or 2011. To be “placed in service” means that the property is ready and available for its specific use.

In the event the eligible solar property has not been placed in service by December 31, 2011 (i.e., (i) above has not been satisfied), an applicant must demonstrate that construction has begun on the project by December 31, 2011. This is evidenced in one of two ways: (i) to begin “physical work of a significant nature” by December 31, 2011, or (ii) to meet a 5% safe harbor.

“Physical work of a significant nature” is evidenced by both on-site and off-site work. An example of on-site work is affixing a solar panel to a roof. An example of off-site work is the production of component parts by a manufacturer for the specific solar panel being used in the project. Preliminary activities do not count as physical work of a significant nature. Thus, activities such as planning or designing, securing financing, or researching will not meet this standard.

The 5% safe harbor is met if the applicant pays or incurs 5% or more of the total cost of the solar property before December 31, 2011. Only those costs included in the eligible basis of the solar property are taken into account for this calculation.

For further reference, the Treasury has issued an “FAQ” on prior guidance for issues concerning the beginning of construction available here.


For solar property, the grant payment is equal to 30% of the basis of the property. The basis is determined in accordance with the general rules for determining the basis of property for federal income tax purposes, and therefore consists of all items properly included in depreciable basis of the property (such as installation costs and freight). An independent accountant’s certificate is required for property with a cost basis in excess of $500,000.


A lessor may elect to pass through a Section 1603 payment to a lessee if the following conditions are satisfied: (i) the property would be eligible for a Section 1603 payment if owned by the lessee; (ii) the lessor agrees to waive all rights to a Section 1603 payment or ITC; (iii) the lessee must include 50% of the Section 1603 payment in income ratable over 5 years; (iv) both the lessor and the lessee must be eligible persons or entities as described above; and (v) the lessor must not be a mutual savings bank or similar financial organization, a regulated investment company, or a real estate investment trust.

Note that special rules also apply for sale-leaseback transactions.


Grant payments are subject to recapture and must be repaid to the Treasury if the applicant disposes of the property to an ineligible person or entity, or the property ceases to qualify as a specified energy property within five years from the date the property is placed in service. Note that a temporary cessation of solar energy production will not result in recapture provided the owner intends to resume solar energy production at the time production ceases. However, a permanent cessation of solar energy production will result in recapture.


Grant applications must be submitted by October 1, 2012. Applications may only be submitted after the applicable property is placed in service or is under construction.


There is no overall cap on available funds for Section 1603 grants. Further, there is no project-specific cap on funds available to a specific applicant. However, as stated above, the maximum amount payable for any one solar project is limited to 30% of eligible costs of that project.


Section 1603 grants are also available for types of qualifying property other than solar, including wind facilities and geothermal heat pumps. For further information on all aspects of Section 1603, please visit

Also, please note that although an applicant must forego ITCs with respect to any property for which a Section 1603 grant payment is received, other federal or state grants or rebates may be available.