ITC, The Early Years
The Investment Tax Credit (ITC) for commercial solar projects was established in the Energy Policy Act of 2005 in section 48 of the Internal Revenue Code (IRC). The popular federal tax credit has enjoyed several extensions since then, with the latest coming in 2015. Currently, a declining percentage of the solar investment tax credit can be claimed by commercial solar projects through 2021 as follows:
2020: Commercial solar projects can claim 26 percent of the project’s cost as an investment tax credit.
2021: The ITC credit is reduced to 22 percent of the commercial solar project costs.
2022 and beyond: The federal tax credit for commercial solar projects settles at 10%. Note that the residential tax credit in section 25D of the IRC expires at the end of 2021.
Some Have More Time
Prior to the 2015 extension, both the residential and commercial sections of the IRC mandated that solar projects were only allowed to claim the ITC credit for the year they were put into service. While this is still the case for individual homeowner projects, section 48 was modified to allow commercial projects to claim the ITC tax credit for the year the project began. This was done to accommodate the longer planning, construction, and commissioning times of large commercial projects.
Determining exactly when a commercial project was started introduced ambiguity and tax code questions. In June of 2018, The IRS finally issued guidance in Notice 2018-59 and defined what constitutes the “Beginning of Construction” and laid out the requirements for claiming the ITC tax credit for commercial solar projects. The guidance allowed for multi-year projects, as long as they were completed and put into service by the end of the calendar year that is up to four years after construction began.
Take Your Pick To Qualify
The 2018 guidance provided two ways for commercial projects to establish when construction began. The first is beginning construction (physical work) of a significant nature, and the second is spending at least 5% (safe harboring)of the total project cost.
To remain qualified for the ITC tax credit back to the year “construction began”, both methods require the commercial solar project, once started, to make continuous progress toward completion. Either method can establish the start of construction. If a project satisfies both methods, then the easiest qualifying event will determine the beginning of the construction date.
There Will Be A Test
The physical work test requires work of a “significant nature” to have commenced in the year the construction begins and can be performed by the owner, contractor, or subcontractor under a binding contract. It can be on-site or off-site and include, among other things, research, planning, design, surveys, drilling, acquiring permits, component manufacturing, installation of support structures, racking, panels, and more.
The 5% safe harbor method requires that 5% or more of the total project cost be incurred in the year claimed as when construction began. If utilizing this method to qualify for the ITC tax credit, it is recommended by tax experts to spend a bit more than the minimum 5%. Suppose there are eventual project cost overruns by the end of the project. In that case, they may change the initial investment amount to represent less than 5% of the total project cost, and therefore, no longer qualify for the ITC tax credit in the original year as planned. While spending at least 5% of the project cost establishes the beginning of construction, to maintain this milestone, the purchased services/products must have reasonably been expected to be delivered within 3-½ months after payment was made.
Continuity: Keep It Moving
With the IRC changes allowing multi-year projects to claim the ITC tax credit from the year in which they began, there are additional rules for maintaining the continuity of a project to keep its qualified start date. The continuity test can be satisfied by maintaining continuous physical work of a significant nature, or incurring additional project expenditures. There are exceptions to the continuity test, which may include severe weather, natural disasters, labor stoppages, financing delays, supply or equipment shortages, and interconnection-related delays.
A Brighter Day On The Horizon
There are multiple legislative efforts in Congress to provide relief to the solar industry by considering exceptions or extensions to some of the time requirements discussed above, such as the 3-½ month rule or the 4-year safe harboring limit that have been significantly affected by the COVID pandemic. President-elect Joe Biden released a clean energy plan in July 2020 outlining his intent to “reform and extend the tax incentives we know generate energy efficiency and clean energy jobs.”
If you are looking to claim the 26% ITC tax credit for 2020 at the 11th hour, call Renvu to help procure your commercial solar equipment and materials. We can help secure your project assets and qualify for the 2020 tax credit through the 5% safe harbor method.
Disclaimer: Solar team members at Renvu are not tax experts. Please consult your tax advisor before deciding which tax credits are applicable to your situation.