An Inside Look at the Section 1603 Grant Review Process

The U.S. Department of the Treasury has issued guidance to assist in preparing Section 1603 Grant applications. The guidance outlines the process used to evaluate the claimed cost basis of solar photovoltaic (PV) property. The guidance addresses only solar PV but states that the evaluation methodology applies to all types of grant eligible property.

Cost basis is defined by the Treasury as the amount of a business’ investment in property for tax purposes. Cost basis includes the cost of the property and certain other costs associated with buying or producing the property such as: engineering, permitting and construction period interest. Applicants are then warned that the stated basis may not reflect the true economic cost of the property and will be ignored for purposes of the determining the basis of the property. This can arise in situations where a transaction is not conducted at arm’s length or other circumstances exist that would influence the buyer to agree to a price in excess of the property’s fair market value.

The first step of the basis review process is to compare the cost basis provided to the benchmarks developed by the Treasury. The table of benchmarks below is reproduced from the guidance. The typical cost is the typical size multiplied by the turnkey price per W. 

  Residential Residential/
Commercial Large
Size Range <10kW     10-100 kW 100-1000kW  >1MW 
Typical Size 5kW  25kW  250kW  2MW 
Turnkey Price per W +/-$7 +/-$6 +/-$5 +/-$4
Typical Cost $35,000 $150,000 $1,250,000 $8,000,000

The benchmark prices reflect high quality equipment and installation by reputable companies. The reviewer will take into account other factors that will influence the price of a system such as technology choice, size, regional market, etc.

If the claimed basis is consistent with the benchmarks the remainder of the cost review will be to examine the detail cost breakdown to ensure that only eligible items have been included. The application will be accepted if there are no ineligible items and there is adequate documentation to support the costs.

Applications that are materially higher than the benchmarks will receive additional scrutiny. The review team will determine if there are related party transactions or other circumstances that may impact the cost basis of the property. In such cases, the review team will evaluate whether the claimed basis is consistent with the property’s fair market value. The review team may ask for more detail cost breakdown including original manufacturer’s invoices, details on subsequent markups, and third party appraisals. The guidance states that markups typically fall in the range of 10 to 20%. If challenged, the appropriateness of the selected markup would need to be addressed. Ultimately, the review team may adjust the basis of the property to the team’s view of the property’s true cost based upon the documentation provided and other relevant information.

In addition to the certifications necessary for some 1603 Grant applications, EisnerAmper can provide other assistance to 1603 Grant applicants, including analyzing eligible and ineligible costs, financial modeling and appraisal services. EisnerAmper is uniquely equipped to assist companies in the renewable energy business.


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