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Payments for Specified Energy Property in Lieu of Tax Credits

Under the American Recovery and Reinvestment Act of 2009

FREQUENTLY ASKED QUESTIONS AND ANSWERS

BEGUN CONSTRUCTION

Q1. How does an applicant demonstrate that construction has begun on a project in 2009, 

2010 or 2011?

A1. There are two ways to show that construction has begun. One is to begin physical work of 

a significant nature. The other is to meet a 5% safe harbor.

Physical Work of a Significant Nature

Q2. What does it mean to begin physical work of a significant nature?

A2. This means that physical work on the specified energy property has started. Physical work 

of a significant nature includes any physical work on the specified energy property at the site. 

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.

Q3. What is included in specified energy property in the case of a qualified facility described in 

section 45 of the Internal Revenue Code?

A3. In the case of a qualified facility described in section 45, specified energy property is 

limited to tangible personal property and other tangible property used as an integral part of the 

activity performed by the qualified facility and located at the site the qualified facility. For such 

a facility, specified energy property includes property integral to the production of electricity, 

but does not include property used for electrical transmission. Thus, physical work on a 

transmission tower located at the site is not physical work of a significant nature because the 

transmission tower is not part of the qualified facility. However, physical work on a 

transformer that steps up the voltage of electricity produced at the facility to the voltage 

needed for transmission is physical work of a significant nature because power conditioning 

equipment is part of the qualified facility.

Q4. How much physical work is required? Is laying the foundation for one wind turbine that is 

part of a larger wind farm sufficient?

A4. In general any physical work on the specified energy property will be treated as the 

beginning of construction even if such work relates to only a small part of the facility, but see 

Q5/A5 below. 

Q5. Once physical work has begun, must physical work on the project be continuous to satisfy 

the requirement that construction has begun? For example, if a single foundation for a wind 
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turbine is laid in 2011 but no other physical work on a 50-turbine project takes place until 2013, 

has the requirement been met?

A5. Treasury will closely scrutinize any construction activity that does not involve a continuous 

program of construction or a contractual obligation to undertake and complete within a 

reasonable time, a continuous program of construction. Disruptions in the work schedule that 

are beyond the applicant’s control (for example, unusual weather or a site at which work can 

only be performed during certain seasons) will be taken into account in determining whether or 

not an applicant has undertaken a continuous program of construction. 

Q6. Is starting work on roads physical work of a significant nature? 

A6. Only work on specified energy property is physical work of a significant nature for purposes 

of showing that construction has begun. In the case of a qualified facility described in section 

45, roads on the site that are integral to the qualified facility are specified energy property; 

these include onsite roads that are used for moving materials to be processed (for example, 

biomass) and roads for equipment to operate and maintain the qualified facility. Starting 

construction on these roads constitutes the beginning of construction. Roads for access to the 

site, or roads used solely for employee or visitor vehicles are not specified energy property;

starting construction on these roads is not starting physical work of a significant nature on 

specified energy property.

Q7. Is preliminary work such as clearing land, obtaining permits or putting up fencing physical 

work of a significant nature?

A7. Preliminary work such as clearing land and obtaining permits is not physical work of a 

significant nature on specified energy property. Erecting a fence (or beginning to erect a fence) 

is not the beginning of physical work of a significant nature because, generally, fencing is not an 

integral part of the qualified facility.

Q8. An applicant plans to build a new facility for the production of electricity from wind power.

The facility will be constructed on an existing wind facility site. In order to construct the new 

wind facility, the existing facility will be dismantled and removed. If an applicant begins to 

remove portions of the existing facility has physical work of a significant nature commenced? 

A8. No. Generally, the cost of removal is associated with the property being removed or is 

capitalized to non-depreciable land. Removal of the existing turbines and towers is preliminary 

work and, therefore, does not constitute physical work of a significant nature on specified 

energy property. 

Q9. Is the construction at the site of a building that will be used for operations and 

maintenance physical work of a significant nature? 

A9. Because a building is not specified energy property, construction of a building is not 

physical work of a significant nature. However, the following structures are not treated as 

buildings for this purpose: (1) a structure that is essentially an item of machinery or equipment, 

or (2) a structure that houses property used as an integral part of a qualified activity if the use 

of the structure is so closely related to the use of the housed property that the structure clearly 
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can be expected to be replaced when the property it initially houses is replaced. See Treas. 

Regs.§ 1.48-1(e)(1).

Q10. Is test drilling of a geothermal deposit considered physical work of a significant nature? 

A10. Test drilling for a geothermal deposit is a preliminary activity and is not physical work of a 

significant nature.

Q11. When is a contract binding?

A11. To be binding, a contract must be enforceable under state law. Additionally, the contract 

terms cannot limit damages in the event of a breach to less than 5% of the total contract price.

Q12. What is included in work performed under a binding written contract?

A12. Work performed under the 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 who is manufacturing solar panels for a number of customers, 

physical work on the panels would only be considered work performed under the applicant’s 

binding written contract if the contractor can reasonably 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. 

Whether a method is reasonable depends on all the relevant facts and circumstances.

Q13. If an applicant purchases components or other parts from the inventory of a vendor 

under a binding written contract entered into before January 1, 2012, has physical work of a 

significant nature begun?

A13. No. Work performed under a contract does not include work to produce components or 

parts that are in existing inventory or are normally held in inventory by a manufacturer.

Q14. If physical work takes place pursuant to a binding written contract on property 

manufactured, constructed or produced for the applicant’s project but the specific site for the 

project will not be identified prior to the deadline for submitting initial applications (or the site 

changes after an initial application is submitted), has physical work of a significant nature 

begun?

A14. If the work performed otherwise meets the requirements for physical work of a significant 

nature and work on the project is continuous (see Q5/A5), the fact that the specific site of the 

project has not been identified at the time of the initial application (or changes after the initial 

application) does not impact whether or not construction has begun.

5% Safe Harbor

Q15. How is the 5% safe harbor met?
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A15. An applicant meets the 5% safe harbor if the applicant pays or incurs 5.00% or more of 

the total cost of the specified energy property before the end of 2011. 

Q16. What does “paid or incurred” mean?

A16. The term “paid or incurred” generally means paid or incurred within the meaning of 

Treas. Regs. §1.461-1(a)(1) and (2). That is, 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) the economic performance test (see Treas. 

Regs. §1.461-4) has been met with respect to such cost. Although the specific reference to the 

§461(h) economic performance rules was deleted in the revised Program Guidance, the 

economic performance rules continue to apply in determining whether costs have been 

incurred. The 5% safe harbor contained in the Program Guidance includes a single exception to

the general principles that are used to determine when amounts are “incurred.” Under general 

rules for property manufactured, constructed, or produced for the applicant by another person 

under a binding written contract that is entered into prior to the manufacture, construction, or 

production of the property, the cost of such property is treated as “incurred” when the 

property is provided to the applicant. The exception is that for periods before the property is 

provided to the applicant, costs incurred with respect to the property by such other person are 

treated as costs of the property that are incurred by the applicant when the costs are incurred 

by such other person.

Q16A: When are costs paid or incurred by the person providing the property to the applicant 

under a binding contract?

A16A: Costs are paid or incurred by the person providing property to the applicant as that 

person pays or incurs costs in connection with providing property to the applicant. For 

example: In 2011, accrual-method taxpayer W enters a binding written contract to provide a 

wind turbine to A in June 2013. In 2011, W, pursuant to a contract with Y, pays Y to provide 

parts in May 2012 for use in the wind turbine. W’s employees provide W with services 

necessary to design and plan for the production of the wind turbine in 2011 and with services 

to manufacture (assemble) the wind turbine in 2013. W incurs the cost to design and plan for 

the production of the turbine assembly in 2011, incurs the costs for the parts in May 2013 when 

Y delivers the parts to W, and incurs the costs for W’s employees to assemble the wind turbine 

in 2013. See § 1.461-4(d)(4), § 1.446-1(c)(1)(ii), and Example 3 of § 1.461-4(d)(7) of the Income 

Tax Regulations. For purposes of determining whether A has met the 5% safe harbor, A may 

only include the costs incurred by W to pay its employees to plan and design the turbine in 

2011.

Q17. If title to the property has passed to the applicant, but the property remains in storage at 

the manufacturer’s site, has the property been provided to the applicant?

A17. Property is provided to the applicant either when title to the property passes to the 

applicant or when it is delivered to or accepted by the applicant, depending on the applicant’s 

method of accounting. In addition, property that the applicant reasonably expects to be 
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provided within 3-1/2 months of the date of payment will be considered to be provided on the 

payment date. See, generally, Treas. Regs. §1.461-4(d)(6).

Q18. In the case of property manufactured, constructed, or produced for the applicant by 

another person (the supplier) under a binding written contract that is entered into prior to the 

manufacture, construction, or production of the property, how does the applicant determine 

what costs have been paid or incurred on its behalf by the supplier? (Note that this Question 

and Question 19 assume that the supplier uses the accrual method of accounting)

A18. The applicant may rely on a statement by the supplier as to the amount incurred by the 

supplier with respect to the property to be manufactured, constructed, or produced for the 

applicant under the binding written contract. The supplier may use any reasonable, consistent

method to allocate the costs incurred by the supplier among the units of property to be 

manufactured, constructed, or produced by the supplier. Only costs incurred by the supplier 

after the binding written contract is entered may be reasonably allocated to the property

manufactured, constructed, or produced under that contract. The economic performance rules 

apply to determine when costs have been incurred by the supplier. The exception described in 

Q16/A16 does not apply in determining when costs are incurred by the supplier. Thus, if 

components are manufactured for the supplier by a subcontractor, the cost of those 

components is incurred only when the components are provided to the supplier and not as the 

subcontractor pays or incurs the costs of manufacturing the components.

 

Q19. An applicant may enter into a binding written contract for multiple units of property to be 

manufactured, constructed, or produced for the applicant by another person under a binding 

written contract that is entered into prior to the manufacture, construction, or production of 

the property. How does the applicant allocate the costs paid or incurred with respect to the 

contract to the units of property acquired pursuant to the contract?

A19. Costs incurred when property is delivered to the applicant are allocated to such property. 

Costs that are treated under Q16/A16 as incurred when incurred by the supplier with respect to 

the property are allocated to the property with respect to which the supplier incurred the costs. 

The supplier may use any reasonable method to allocate the costs it incurs among the units of 

property manufactured, constructed or produced by the supplier and to allocate the units of 

property it produces among its customers. Whether a method is reasonable depends on all the 

relevant facts and circumstances. In addition, property that the supplier reasonably expects to 

receive from a subcontractor within 3-1/2 months of the date of the supplier’s payment to the 

subcontractor is considered to be provided by the payment date. See, generally, Treas. Regs. 

§1.461-4(d)(6). 

Q20. A developer may enter into a binding written contract for multiple units of property to be 

manufactured, constructed, or produced for the developer by another person under a binding 

written contract (a “master contract”) that is entered into prior to the manufacture, 

construction, or production of the property. The developer may then assign its rights to certain 

units of property to an affiliated special purpose vehicle (generally, a limited liability company) 

that will own the project for which such property is to be used and will apply for the payment. 

Such assignment typically is represented by a new contract (the “project contract”) between 
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the special purpose vehicle and the person manufacturing, constructing, or producing the 

property. An adjustment is then made to the master contract between the developer and the 

person manufacturing, constructing, or producing the property to reflect the assignment. 

Assume costs paid or incurred with respect to the master contract between the developer and 

the person manufacturing, constructing, or producing the property are considered to have been 

paid or incurred in 2009, 2010, or 2011 for purposes of determining whether construction has 

started. For purposes of determining whether construction has started, may these costs then 

be allocated to the special purpose vehicle if its project contract and the master contract, as 

adjusted, both reflect this assignment?

A20. Costs that are allocated to the property under the principles of Q19/A19 are treated as 

costs of the property notwithstanding the substitution of the project contract with respect to 

such property.

Q21. What happens if the project’s costs are more than expected? Is it sufficient to show that 

an applicant reasonably expected costs paid or incurred before the end of 2011 to be 5% of the 

project costs?

A21. No. To satisfy the 5% safe harbor applicants must demonstrate that costs paid or incurred 

before the end of 2011 are equal to or greater than 5% of the actual total costs of the specified 

energy property. However, if the applicant’s project includes multiple units of specified energy 

property, an applicant can opt to apply for a payment based on some, but not all, units of 

property. For example, if an applicant incurs $25,000 in costs in 2011 for specified energy 

property in a 5 turbine wind farm anticipating total costs for specified energy property of 

$500,000 but the actual total costs of specified energy property amount to $600,000, the safe 

harbor would not be satisfied. However, the applicant can opt to apply for a payment based on 

the costs of 3 turbines and would satisfy the safe harbor if the $25,000 of costs incurred in 2011

relates to the 3 turbines and their total cost does not exceed $500,000.

Q22. An applicant demonstrates that the applicant meets the 5% safe harbor as of December 

31, 2011, with respect to a facility. The facility will not be placed in service until 2012. Must 

the applicant continue to work at the site in 2012 in order to qualify for payment in 2013?

A22. No.

Q23. For applicants relying on the 5% safe harbor, what happens if ownership of the energy 

property changes between the time the property is acquired for use in a project and the time 

the project is placed in service? 

A23. If a person (the transferor) contributes, assigns or transfers property to a second person 

(the transferee) and the transferee uses the property in a project, the transferee is treated for 

purposes of the 5% safe harbor as having paid or incurred, at the same time as the transferor, 

the costs that the transferor paid or incurred to acquire the property, but only if the transferor 

acquired the property for use in that project and is related to the transferee. A transferee and 

transferor that are related persons within the meaning of section 197(f)(9)(C) of the Internal 

Revenue Code immediately before or immediately after the contribution, assignment, or 

transfer of the property will be considered related for this purpose. However, if property is sold 

to an unrelated purchaser after December 31, 2011, the purchaser may not take the costs that 
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the transferor incurred with respect to the property into account in determining whether the 

5% safe harbor is met. This limitation does not apply in the case of a sale/leaseback 

arrangement. If an entity which met the 5% safe harbor with respect to a facility sells the 

facility to an unrelated entity and leases the facility back from that entity within 90 days of the 

placed in service date, the purchaser of the facility (assuming all other eligibility requirements 

are met) would be treated as satisfying the 5% safe harbor.

Q24. For applicants relying on the 5% safe harbor, what happens if ownership of the entity that 

met the 5% safe harbor changes before the property is placed in service?

A.24. If ownership of the entity that met the 5% safe harbor changes after December 31, 2011, 

and before the property is placed in service, eligibility is not affected if (1) the purchaser is an 

otherwise eligible Section 1603 applicant and (2) the entity being sold had commenced 

development of a project as evidenced by activity such as acquiring land, obtaining permits and 

licenses, entering into a power purchase agreement, entering into an interconnection 

agreement, and contracting with an Engineering, Procurement and Construction contractor. 

The purchaser of an entity which holds equipment only may not rely on costs paid or incurred 

to acquire that equipment. For example, a project company meets the safe harbor and 

commences development of a project by acquiring permits, a power purchase agreement and 

an interconnection agreement. A partnership interest in the project company is sold to a tax 

equity investor (or the tax equity investor makes a capital contribution in exchange for a 

partnership interest) in a partnership flip transaction. The project company (with the tax equity 

investor as a partner) may rely on costs incurred by the project company to satisfy the 5% safe 

harbor. On the other hand, if a project company meets the safe harbor by purchasing and 

taking delivery of equipment but does no other activity, the purchaser of the project company 

may not rely on costs incurred by the project company to satisfy the 5% safe harbor. 

Process

Q25. Under what circumstances and when is an applicant required to submit an application 

demonstrating that construction has begun? 

A25. All applications must be submitted before the statutory deadline of October 1, 2012. For 

property that has been or will be placed in service in 2009, 2010, or 2011 an application 

demonstrating that construction has begun is not required. For property that is placed in 

service after December 31, 2011, but before October 1, 2012, applicants may submit an 

application before October 1, 2012, demonstrating both that construction began on the 

property in 2009, 2010, or 2011 and that the property has been placed in service. For property 

that is placed in service on or after October 1, 2012, applicants must submit a preliminary 

application before October 1, 2012, demonstrating that construction on the property began in 

2009, 2010, or 2011. Such applications must then be supplemented at the time the property is 

placed in service. 

Q26. If an applicant submits an application demonstrating that construction has begun, will the 

applicant receive a response? 
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A26. Yes. Although we cannot provide assurance that an applicant meets all the requirements 

for a payment until all facts and circumstances are known (at time the facility is placed in 

service), we will tell the applicant whether or not the work performed is physical work of a 

significant nature or, for applicants relying on the safe harbor, whether qualifying costs have 

been paid or incurred.

Q27. What documentation is required?

A27. For projects relying on “physical work of a significant nature” applicants must document 

the physical work. For example, to demonstrate that physical work of a significant nature has 

commenced at the site, applicants should submit a written report from the project engineer or 

installer, signed under penalties of perjury, describing the project’s eligibility; including a 

detailed construction schedule; estimated budget for the project and a description of the work 

that has commenced including any invoices for the work performed. For projects with an 

anticipated cost basis of $1 million or more, the report must be from an independent engineer. 

To demonstrate that physical work of a significant nature has commenced under a binding 

written contract, applicants should submit a copy of the binding written contract and a 

statement from the contractor, signed under penalties of perjury, describing the work that has 

commenced and certifying that the work commenced pursuant to the binding written contract. 

For projects relying on the 5% safe harbor, applicants must submit a statement from an 

authorized representative of the applicant signed under penalties of perjury, or for projects 

with an estimated eligible cost basis of $1 million or more, from an independent accountant, 

attesting to the method of accounting used by the applicant for federal tax purposes (cash or 

accrual). For applicants that use the cash method of accounting, the statement should state 

the amount that has been paid before the end of 2011; a detailed description of the costs that 

have been paid; and an estimate of the total cost of the specified energy property and must 

include evidence of payment such as invoices or other financial records. For applicants that use 

the accrual method of accounting, the statement should state the amount that has been 

incurred before the end of 2011; a detailed description of the costs incurred; and an estimate 

of the total cost of the specified energy property and must include evidence of the costs 

incurred such as invoices or other financial records. If an applicant is relying on costs paid or 

incurred by a contractor, a copy of the binding written contract and a statement from the 

contractor, signed under penalty of perjury, of costs paid or incurred and allocated to 

applicant’s project must be included. 

Additional documentation may also be required depending on the facts and circumstances. If 

additional documentation is required applicants will be notified.