By Donald T. Ross

A critical component of the American Recovery and Reinvestment Tax Act of 2009 (a.k.a. the Stimulus) is the Department of Treasury’s (“Treasury”) Payments for Specified Energy in Lieu of Tax Credits.  Rather than claim a tax credit based on placing certain specified energy property in service, applicants receive a cash grant directly from the United States Treasury during the year in which the property is placed in service.  As with most targeted government incentives, the devil is in the details, particularly as to the timing of the project.

Eligible projects include wind, biomass, geothermal, hydropower, and solar projects.  Depending on the type of project, the tax credit will be equal to either 10% or 30% of the cost basis of the property.  Eligible property includes only the tangible property that is “an integral part of the facility.”

The property must be placed in service between January 1, 2009, and December 31, 2011, unless construction of the property commences prior to December 31, 2011.  Then  the property may be placed in service after 2011 but before an applicable “credit termination date” (depending on the type of project, this date is either Jan. 1, 2013,  Jan. 1, 2014, or Jan. 1, 2017).  In any case, a completed application must be submitted prior to October 1, 2012.

A key element in the Treasury’s analysis of eligibility includes what constitutes commencement of construction.  The Treasury will analyze whether significant physical work has begun prior to the end of 2011; this includes the contract terms between the taxpayer and its contractors and, most critically, whether at least 5% of the total cost of the property has been paid or incurred by the taxpayer (or as the case may be, paid or incurred by the taxpayer’s contractor) by the end of this year.

As might be expected, the Treasury will require extensive documentation of the costs involved and timing regarding the payment or incurring of those costs.  It is critical that any entity seeking to obtain this grant-in-lieu-of-credit plan strategically address each of the elements related to procurement of services or property for an eligible renewable energy project.