The Treasury Department is vested with the authority to review and approve applications for funding by the Section 1603 grant program. In completing such applications, applicants should consider the key areas of concern and past rejection by the Treasury Department. In addition, a recent Chief Counsel Attorney Memorandum explains that the Internal Revenue Service will retain authority to audit Section 1603 grants because excess grants result in understated income. Applicants should review their applications in light of the Treasury Department’s initial review and possible audit by the IRS.
Key Areas of Concern
The Treasury Department has issued reports that identify costs claimed by applicants that the Treasury Department declared ineligible. Some of the rejected costs are identified below:
- General contractor settlement: Changes or settlements with contractors that result in reduced expenses should likewise be reduced in the Section 1603 application.
- Non-Allocable Permit fees: Certain permit fees for buildings and machinery were neither a direct nor indirect allocable cost of specified energy property.
- Potable Water and Septic Sewer System Labor: Costs of a potable water and septic sewer system were ineligible because they were to provide drinking water and supply water to staff restrooms of the control room building. Among other reasons, these costs do not qualify because the control room building itself did not qualify.
- Excessive Engineering Labor Costs: An application included costs for engineering labor that exceeded the invoices from the engineering firm. The excess was not explained and was denied.
- Unsupported Costs: Certain ccrued costs that are not adjusted to reflect the actual costs (e.g., purchase order costs) are not eligible.
- Insurance Premiums for Unused Equipment: Insurance premiums covering heat collection element tubes that were not used in connection with the applicable project were denied.
- Interest for Late Payments: Interest on late payments was denied where there payment was not actually late when viewed in light of the applicable contract.
- Warranty: Payment for warranty was denied because, while the applicant requested the manufacturer’s warranty, it did not make payment for the warranty in accordance with the contract until the following year. The payment did not comply with the economic performance rules.
- Title Received After Application: Costs for spare parts were denied because title was not received until six months after submission of the application.
- Transmission Assets: Costs of structural steel and weatherization materials used for transmission line towers were ineligible.
- Office Furniture: Costs for office furniture were deemed ineligible.
An application for funding under Section 1603 must be based on tax law concerning the construction and procurement of specified energy property. Not all costs qualify. For this reason, applicants must consult with tax counsel to determine whether costs qualify, and to ensure that all eligible costs are included in the application.
Excess Payments Are Taxable
In guidance from the IRS, taxpayers are warned that the receipt of excess Section 1603 grants will result in taxable income. It further explained, however, that the return of excess funds will result in an offsetting deduction. If a taxpayer receives and repays excess funds in the same year, it need not report gross income or offsetting deduction. In addition, no basis reduction occurs for returned excess funds.