For the first time since Congress created the Section 1603 grant program1 the U.S. Department of the Treasury has released specific cost benchmarks for applicants to use in determining a cost basis that is likely to be considered reasonable.
Since the program’s inception, more than 3,000 grants have been awarded, and the recent guidance on cost basis should help provide additional certainty to potential applicants in an otherwise uncertain economic climate.
A key component of a grant application review by Treasury is whether the applicant has properly represented and calculated its cost basis, or the total amount of the applicant’s investment in the renewable energy property for purposes of determining the grant amount. Although the cost basis generally is the total cost of the property, including certain related “soft costs,” such as those for permitting and engineering,2 there are circumstances where Treasury may determine that a taxpayer’s stated cost basis does not reflect the true economic cost.
For example, a stated cost could be inconsistent with the true basis if “a transaction is not conducted at an arm’s length by two economically self-interested parties or where a transaction is based upon ‘particular circumstances’ which influence the purchaser to agree to a price in excess of the property’s fair market value.” In such cases, the basis will be scrutinized more closely by Treasury.
Comparison of Claimed Basis to Benchmarks
Treasury has released benchmark figures for solar power projects that it used in its evaluations of the claimed basis in applications placed in service during the first quarter of 2011. These benchmarks are continuously updated as necessary and based on open-market, arm’s length transactions between unrelated parties with adverse economic interests. In addition to expert analyses and data from existing grant applications, sources for the benchmark figures include publicly available information such as U.S. Department of Energy studies and data from the California Solar Initiative, as well as confidential interviews with nationally recognized solar industry officials. The benchmark solar PV market prices, as broken out by system size and type, can be seen here.
Obviously, Treasury will consider factors such as technology choice, regional market differences, or specific characteristics of the property in evaluating variations from these benchmarks. If a claimed basis is consistent with the benchmarks, Treasury’s review will focus on ensuring that only eligible items are included and that no cost has been inappropriately attributed to the property. However, applications with a materially higher claimed basis likely will receive closer scrutiny. In addition to the factors described above, Treasury will evaluate whether the transaction was influenced by other related transactions or involved related parties. Examples of related parties include situations in which (1) the applicant is related to the developer, supplier, or installer, or (2) the applicant is a party to another non-adverse-related transaction with the developer, such as cases in which the applicant is purchasing the energy property from the developer and leasing it back to the developer.
If Treasury’s review indicates that there is an unexplained variation from the benchmarks, it may request that the applicant submit a more detailed cost breakdown or a credible third-party appraisal, or may adjust the basis on which the grant payment is made.
Suggestions for Applicants
Applicants should review the Treasury benchmarks, and if the stated cost basis is materially above the posted benchmarks, should include supplemental documentation to substantiate such variations. If a transaction also involves related parties, applicants should demonstrate clearly how the cost basis is consistent with fair market value by providing additional documentation or a credible third-party appraisal.