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Fortnightly Magazine - October 2010

are beyond the applicant’s control—for example, unusual weather or a site—will be taken into account in determining whether or not an applicant has undertaken a continuous program of construction.

As noted, physical work of a significant nature also includes physical work that has taken place under a binding written contract for the manufacture, construction, or production of specified energy property for use by the applicant’s facility, provided the contract is entered into prior to the work taking place.

To be binding, a contract must be enforceable under state law. Additionally, the contract terms can’t limit damages in the event of a breach to less than 5 percent of the total contract price.

Work performed under a contract includes only work that takes place after the binding written contract is entered into. The work is treated as physical work of a significant nature only if it is work on property that will become specified energy property of the applicant. For example, if a contractor is manufacturing solar panels specifically for the applicant under a binding written contract, any physical work on those panels is physical work of a significant nature on specified energy property of the applicant. If an applicant has a binding written contract with a contractor that’s manufacturing solar panels for several different customers, physical work on the panels only would be considered work performed under the applicant’s binding written contract if the contractor reasonably can demonstrate that physical work has started on panels that will become specified energy property of the applicant. The contractor may use any reasonable, consistent method to allocate work it performs among its customers.

If an applicant purchases components or other parts from the inventory of a vendor under a binding written contract, physical work of a significant nature hasn’t begun because work performed under a contract doesn’t include work to produce components or parts that are in existing inventory or are normally held in inventory by a manufacturer.

If physical work takes place under a binding, written contract on property manufactured, constructed or produced for the applicant’s project, but the specific site for the project isn’t identified before the deadline for submitting initial applications (or the site changes after an initial application is submitted), the fact that the specific site of the project hasn’t been identified (or changes after the initial application) doesn’t affect the determination of whether construction has begun.

5-Percent Safe Harbor

An applicant meets the 5-percent safe harbor if the applicant pays or incurs 5 percent or more of the total cost of the specified energy property before the end of 2010.

What does “paid or incurred” mean? Costs are taken into account when cash-method taxpayers “pay” them and when accrual-method taxpayers “incur” them. A cost is generally incurred for tax purposes when: 1) the fact of the liability is fixed; 2) the amount of the liability is determinable with reasonable accuracy; and 3) “economic performance” has occurred with respect to the liability. The 5-percent safe harbor includes a single exception to the foregoing general principles used to determine when amounts are