Treasury Department guidelines provided two ways for the grant applicant to “begin construction.” One way was to begin significant physical work. The second way is a “Safe Harbor” provision for applicants that paid or incurred more than 5% of the total cost of the project in 2011.

 As of December 31, 2011, the deadline for the 1603 Grant and the required 5% safe harbor came to an end. Many developers beginning projects are still questioning whether they are really safe-harbor protected.  While Treasury had a list of frequently asked questions, many of the answers were vague and left room for considerable interpretation.

 The Green Team at Rodman & Rodman has worked closely with attorneys, developers and experts to make sure projects are safe harbor. We are an independent accounting firm specializing in renewable energy projects.

 Below are ten questions to ask yourself. If you are unsure of any of the answers, please contact us and we can review your project to see if you meet the safe harbor requirements.*

1. Did you have a legal binding contract by December 31, 2011?
2. Did you pay or incur 5% of the total eligible cost of the project before December 31, 2011? (Remember not all costs are eligible for the 1603 grant. It is important you safe harbored the correct cost.)
3. Was part of the cost incurred for the safe harbor “soft cost”, if so, how much? The Treasury is reviewing “soft cost” very carefully. Did you have “hard cost” as well?
4. Are there related parties involved in the transaction? Was the transaction done at “arms-length”?
5. Accounting method: Are you an accrual or cash basis taxpayer for income tax purposes? Did you pay the cost as of December 31, 2011 or did you incur them? Did you follow the guideline based on your accounting method?
6. Title transfer: Did you receive title of equipment within 3½ months of payment date?
7. Was that entity that purchased the equipment created before December 31, 2011, or are you contributing the assets to an entity after December 31, 2011? Was your entity setup correctly? Treasury will look carefully at ownership structure.     
8. How is the project funded?  Debt? Grants? Other?
9. When will your project be placed in service?
10. If the cost basis is more than $500,000 you will need an independent accountant to certify the cost. If the requesting payment is greater than $1 million you will need an independent accountant’s examination option attesting to the accuracy of the cost claimed as part of the basis of the property. Do you have an accounting firm that specializes in 1603.  Are they independent?

Please email kathy@rodmancpa.com or give me a call at 617-965-5959 to discuss further.

*Rodman & Rodman, P.C. cannot guarantee that your 1603 project will be accepted by the United States Treasury nor can we guarantee that all the expenses incurred for safe harbor of the 1603 will be accepted by the United States Treasury. While Rodman & Rodman provides advisory, we cannot assume responsibility for the project. The 1603 process is long and cumbersome. The United States Treasury has the right to deny an application. Rodman & Rodman will not be held accountable if the application is denied, nor will we be financially responsible if the application is denied.

 S Corporation Wages: The owner of a professional company structured his firm as an S Corporation, which he owned 100%. The IRS opened an audit of his firm and found the following for the two years audited: 

 The firm paid $24,000 per year in compensation and made profit distributions of $203K and $175K for both years to the taxpayer through his S corporation. 

 An IRS expert estimated the FMV of taxpayer’s services to be $91K per year. The 8th Circuit upheld the District Court’s findings that (1) the taxpayer was a qualified professional with an advanced degree and 20 years experience, (2) he worked 35-45 hours per week as a primary earner in a reputable firm with substantial gross earnings, and (3) the $24,000 salary was unreasonably low compared to other similarly situated professionals. David Watson PC v. U.S. , 109 AFTR 2d 2012-XXXX (8th Cir.).

 S corporations should be reviewing their owners’ salaries to confirm they are reasonable and meet the IRS guidelines.

 ”It is important to keep the environment clean, especially in an urban setting such as Boston,” noted Vitello.  “We need to conserve the natural areas that we do have, so they can be enjoyed by future generations.”

 According to the Conservancy’s website, “Since 2002, over 16,000 Conservancy Volunteers have contributed over $1 million of donated labor to improve the health, safety and beauty of the Charles River Parklands.”

Internal Revenue Code section 179D allows a deduction to a taxpayer for part or all of the cost of energy efficient commercial building property that the taxpayer places in service after December 31, 2005, and before January 1, 2014. The maximum deduction is based on energy savings and square footage of the building although partial deductions are allowed as well.

 In general, an energy efficient commercial building property is depreciable property that: (1) is installed on or in any building that is located in the U.S. and is within certain standards, (2) is installed as part of the interior lighting systems, the heating, cooling, ventilation, and hot water systems (HVAC), or the building envelope and (3) is certified as being installed as part of a plan designed to reduce the total annual energy and power costs for the interior lighting and HVAC systems of the building by 50% or more in comparison to certain mandated minimum standards.

 Based on the new standards, lighting systems will need to save more energy but HVAC systems will need to save less to qualify for the partial deduction. This should provide stimulus to the HVAC industry while also providing opportunities for additional tax savings for those seeking to upgrade energy efficient buildings.

 Back out of an IRA conversion. If you converted a traditional IRA into a Roth IRA in 2011, you knew you’d have to report the taxable part of the traditional-IRA withdrawal on your 2011 tax return. But you may not have planned on a year-end surge in your income (for example, from a bonus or stock market gains). That extra income propelled you into a higher tax bracket, or will rob you of tax breaks (such as the education credit) that phase out at higher levels of adjusted gross income (AGI). You can’t back out of your bonus or stock market gains (nor would you want to), but you can back out of that taxable Roth IRA conversion. Through a mechanism known as “recharacterization,” you can undo the conversion and turn the Roth IRA back into a traditional IRA. Net result: Without the taxable income from the conversion, you may avoid being taxed in a higher bracket and/or may keep your AGI below the point where you would lose tax breaks.

 Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2011? That may help you years down the road when you take tax-free payouts from the account (if you’re eligible), but the contribution isn’t deductible. If you realize you need the deduction that a contribution to a regular IRA yields, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution (again, via the “recharacterization” mechanism). The IRA deduction is yours if neither you nor your spouse is covered by an employer-provided retirement plan. If either you or your spouse is covered by an employer-provided retirement plan, then the deduction starts to phase out when AGI exceeds certain limits, depending on filing status (for example, for 2011, the phaseout for joint filers starts at $90,000 of AGI).

 Make a deductible IRA contribution, even if you don’t work.  As a general rule, you can’t make a deductible IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner while you manage the home front. For 2011, you can make a deductible IRA contribution of up to $5,000 ($6,000 if you are 50 or over) even if you have no earned income. What’s more, even if your spouse is covered by an employer-provided retirement plan, you can still make a fully deductible IRA contribution as long as your joint AGI as specially computed doesn’t exceed $169,000. To be deductible for the 2011 tax year, the IRA contribution must be made no later than your tax return due date.

 Claim a moving expense deduction because of your spouse’s job.  Job-related moving expenses (the cost of moving household goods and personal effects plus transportation and lodging en-route) are above-the-line deductions, which can be claimed even by non-itemizers. This write-off generally is available only if (1) you start a new job or business at the new location (or are transferred by your employer), and (2) the new job location is at least 50 miles farther from your old home than your old job was from your old home. Even if you don’t qualify, however, you can claim the write-off if your spouse does. The fact that your move was driven by your job-related needs, not your spouse’s, doesn’t matter.

 For example, you’re sick of a long, tough commute from distant suburbs to your city office. You sell your home and buy a condo that’s a ten-minute walk from work. Your spouse decides to return to the job market after a long absence and lands a job in public relations. You can’t qualify for moving expense deductions on the strength of your move, because you didn’t change your job or your work location. But you can deduct moving expenses if the distance between your spouse’s job and your old home is at least 50 miles (this is a special distance test for those returning to the job market). Your spouse must stay at the new job for certain minimum time period, however.

 Partial swap of annuity contract is tax-free. It is well known that it is possible to swap an entire annuity contract for another (for example, to get a better yield) without paying a current tax. However, you might not be aware that it is also possible to make a tax-free direct transfer of part of the funds in an annuity contract to an annuity contract with another company. So if you made a direct transfer of part of your money in an annuity contract in 2011 to an annuity contract with another company, you don’t owe tax on the switch.

 It may pay for you not to claim a dependency deduction for a child in college. This can work to your family’s benefit if you pay college tuition for your child, your income is too high for you to claim education credits (i.e., the American Opportunity tax credit (AOTC)/modified Hope credit and the Lifetime Learning credit), and your child has enough taxable income to make use of most or all of the credit. If you forego the dependency deduction, your child can claim the education credits on his or her return for expenses paid by the child, even though the education expenses were paid out of gifts, loans, or personal savings, including savings from a qualified tuition program (also referred to as a 529 plan). The tax-cutting value of the education credits that the child can claim may be greater than the value to you of the dependency exemption for the child. Note, however, that the child can’t claim a personal exemption for himself or herself if you are eligible to, but don’t, claim a dependency exemption for the child.

 Decide between an education credit and the higher education deduction. If you paid college expenses in 2011, you may be able to choose between taking an education credit (AOTC or Lifetime Learning credit) or the deduction for higher education expenses. In making this choice, note that the value of the deduction is greater if your marginal tax bracket is higher, while the value of the credit is the same regardless of your bracket. Another factor to bear in mind in making the choice is that different income cut-off points apply to the credits and the deduction. For 2011, the AOTC is phased out ratably for taxpayers with modified adjusted gross income (AGI) of $80,000 to $90,000 ($160,000 to $180,000 for joint returns), and the Lifetime Learning credit is phased out ratably for taxpayers with modified AGI of $51,000 to $61,000 ($102,000 to $122,000 for joint returns).

 Write off the cost of a tutor as an education expense. You can deduct the cost of education that maintains or improves the skills required in your business or employment, but not costs to meet the minimum requirements of your trade or profession, or to qualify you for a new job. “Education” doesn’t have to be of the classroom variety. For example, suppose you’re a sales executive who suddenly had to become an e-commerce expert. You hired a consultant to be your tutor and teach you everything you need to know. That cost is deductible as an education expense. But you can only claim it on Schedule A, Form 1040 as a miscellaneous itemized deduction. Such deductions can be claimed only to the extent their cumulative total exceeds 2% of your AGI.

 Home improvements may be medical expense deductions. Home improvements generally aren’t deductible. But a medical expense deduction may be claimed if you make a medically necessary home improvement, such as a lift or elevator for a handicapped person, or a therapy spa for an arthritis sufferer. The cost of such an expense is deductible as a medical expense to the extent it exceeds any resulting increase in value of the property. For example, if a qualifying improvement costing $5,000 increases the value of your home by $2,000, the medical expense is $3,000. Note, however, that medical expenses can be claimed on Schedule A, Form 1040 only to the extent they exceed 7.5% of your AGI.

Employee pay can help you write off business equipment. A tax break for small businesses allows you annually to expense (that is, to currently deduct) the cost of machinery and equipment up to a certain amount ($500,000 for tax years beginning in 2011). Assets that aren’t expensed can only be written off over a period of years via depreciation deductions (usually five or seven years, unless the asset is eligible for “100% bonus depreciation”). However, among other conditions, the maximum annual expensing amount is limited to your taxable income from any active trade or business for the year in which you buy the equipment and place it in service. So, if there’s no money coming in during your startup year, there’s no expensing for that year. Fortunately, your salary as an employee counts as taxable income for expensing purposes. Therefore, if you start up a sideline business as a sole proprietorship and buy computers, printers, scanners, etc., you can write off their cost (up to the annual dollar limit-$500,000 for the 2011 tax year) even if there’s no business income yet, as long as your salary in that year at least equals what you spent on the equipment. The expensing deduction can offset your other income.

 Maximize deductions for automobiles used in business. If, in 2011, you purchased and placed in service an automobile used in your business, you have two choices on how to deduct expenses related to the vehicle: (1) you can use a standard mileage rate (for 2011, 51 cents for each business mile driven during the first half of 2011, and 55.5 cents for each business mile driven during the second half of 2011), or (2) you can deduct actual expenses, including depreciation. The standard mileage deduction is relatively easy to compute. Simply multiply the number of miles the vehicle was driven for business by 51 cents or 55.5 cents, depending on which half of 2011 the vehicle was driven for business. Determining actual expenses requires more work. All of the expenses for the vehicle, for example, insurance, gas, repairs, garage rent, etc., must be added up. In addition, a depreciation deduction is allowable under the actual expense method (the standard mileage rate has an amount for depreciation built into it). For a vehicle purchased and placed in service in 2011 and used more than 50% for business, the depreciation deduction for 2011 is 20% of the car’s cost, subject to a maximum deduction of $3,060 (under the so-called “luxury auto rules”) The $3,060 limitation is increased to $11,060 for passenger automobiles that are allowed bonus depreciation. If the vehicle is used less than 100% for business, the portion of the expenses attributable to non-business use is not deductible.

 However, making use of the credit can be very difficult with small and medium sized projects.  It is rare that the developer will have the tax appetite.  For example, a 

$2 million project generates a $600,000 credit which is a significant tax credit to make use of for the typical regional developer.  The 30% cash grant in lieu of the credit didn’t cost the government any more dollars but certainly made financing a project much more practical.

 Now the developer will likely need to find an investor for the project who is interested in being allocated the tax credits in exchange for his investment dollars.  The large banks that participate this way on utility scale deals are not interested in a few million dollars of credits, never mind a $2 million project that generates $600,000 of credits.  Smaller institutions typically don’t have the experience with this type of investment.  High net worth individuals need to have “passive” income to qualify.  This precludes the doctors and dentists with large salary, interest and dividend income from qualifying as those types of income are not considered passive and the ITC cannot offset taxes from active and portfolio income.

 The growth in the industry over the last few years can be directly traced to the incentives programs like the ITC and the 1603 Program.  The challenges from expiration of the grant program will be overcome with creativity and education of the capital marketplace.  But there will be a slowdown until this fully evolves.   Keep checking back with the Green Team.   We will keep you informed on any new opportunities that arise.

 Below we’ve listed some of the most typical – please contact any Rodman team member to discuss if you have particular concerns.

• Emails that appear to be from the IRS or the Electronic Federal Tax Payment System requesting financial information. Typically they try to get your attention by claiming they need the information to process your refund. Please note – the IRS does not try to contact taxpayers through email.
• Identity theft used to collect a tax refund. If you are concerned someone is using your personal information, please visit www.irs.gov/identitytheft for more information.

Refund anticipation loans – as long as your return is e-filed you will receive your refund in a relatively short period of time. It’s worth the wait.

The Solar Power Advocacy Network and the Solar Energy Industries Association have created an advocacy letter for you to send to your Senators and ask them to consider passing the 1603 extension.  We have included the link below for you to access their webpage.  You only need your zip code and a valid e-mail address.  The letter is pre-typed for you, or you can personalize it if you would like. 

Please take a moment to contact your Senators and encourage them to pass this important piece of legislation.

Click here to contact your Senators.

Thanks,

The Rodman & Rodman Green Team

 With this new schedule, calculating the rate of return on a solar project now contains more certainty as to what the return will be on each SREC. This is a big benefit to project developers and financers as now instead of an unpredictable 10% adjustment, there is a known 5% decrease each year.

Please call at 617-965-5959 with any questions.