On Friday, June 22, 2018, the Internal Revenue Service issued guidance clarifying when construction commences for purposes of qualifying for the investment tax credit (“ITC”) for solar photovoltaic facilities. The ITC is a dollar-for-dollar reduction in federal income tax due by the taxpayer equal to a specified percentage of the eligible basis (generally the cost) of an energy project originally placed in service by the taxpayer. The percentage of the ITC depends on when construction begins on the eligible project, and hence the guidance received by the IRS is critical.
As a result of the PATH Act, the ITC percentage for solar facilities, which traditionally has been 30 percent of the eligible basis, phases out as follows:
- 30% for projects that begin construction by the end of 2019
- 26% for projects that begin construction in 2020
- 22% for projects that begin construction in 2021
- 10% for projects that begin construction in 2022 or after
The IRS’s recent guidance, IRS Notice 2018-59, defines when “construction begins” for purposes of qualifying for the ITC. Per the IRS’s guidance, construction begins on the earlier of (1) when physical work of a significant nature begins, or (2) when the taxpayer has paid or incurred 5% or more of the total project costs (the 5% safe harbor). If the physical work of a significant nature test is used, a continuous program of construction must be maintained. If the 5% safe harbor is used, the taxpayer must make continuous efforts to advance completion of the project. With respect to either test, the IRS provides a continuity safe harbor, whereby if the property is placed in service by the end of the fourth year following the beginning of construction, the continuous program of construction/continuous efforts test will be considered met. In other words, taxpayers have 4+ years to complete their project and still have the beginning construction date respected.
These are the same basic rules that have applied for many years with respect to certain other renewable energy facilities, including wind. It is also worth noting that Notice 2018-59 also provides guidance with respect to qualifying for the ITC for other types of energy resources, including geothermal property, fuel cell property, microturbine, small wind, and combined heat and power (CHP), for which beginning construction guidance had not previously been provided.
Industry analysts have reacted positively to IRS Notice 2018-59. It likely will allow solar developers to avoid solar tariffs on imports through 2021, acquire a majority of their solar panels in later years, and still qualify for the higher tax credits.
Should you have any questions regarding what this means for contemplated projects or for those already in development, please contact Kris Eimicke.