“In the absence of this commence-construction guidance, tax equity partners were growing cautious about project risk.”
The Internal Revenue Service released a new guidance Friday that establishes when the construction of a solar facility starts to qualify for the solar Investment Tax Credit.
The guidance, Notice 2018-59, provides two methods for determining the “commence-construction” date: 1) starting physical work of a significant nature or 2) meeting the “5 percent safe harbor test” by incurring 5 percent or more of the total cost of the facility in the year that construction begins.
Both residential and commercial solar projects may qualify for the full 30 percent Investment Tax Credit (ITC) through 2019, as long as the project is placed into service before 2024. The ITC steps down to 26 percent in 2020, then 22 percent in 2021. In 2022, the residential credit (Section 25D) will drop to zero, while the commercial and utility credit will drop to a permanent 10 percent.
The new IRS guidance on the ITC closely follows a separate guidance published for the wind industry’s Production Tax Credit (PTC). According to the research firm Washington Analysis, the IRS guidance includes “few surprises or anything that would suggest an effort to limit the credit’s benefit for the industry.”
Washington Analysis researchers anticipate clarifying the tax law will produce an upside for solar companies, including First Solar, SunPower, Canadian Solar, Sunrun, Tesla and Vivint Solar.
Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association (SEIA), praised the IRS notice.
“The IRS has taken an important step forward with this guidance and provided certainty that will help solar project sponsors finance and build more solar,” said Hopper, in a statement. “Our members have been working hard to secure financing for projects and keep them on track to meet critical development and construction milestones. This guidance provides them with a strong timeline for keeping up momentum for new projects.
“In the absence of this commence construction guidance, tax equity partners were growing cautious about project risk,” she added. “We look forward to working with the IRS to ensure the guidance is implemented in a way that keeps this solar economic engine moving forward.
Congress voted to extend the ITC and PTC in 2015, in a major victory for the renewable energy sector. With the sunset date on the horizon, renewable energy investors have launched a campaign to push policymakers to implement a long-term policy driver for clean energy resources.
“We’re looking at a world where in the early 2020s, business-as-usual projections have the renewable sector’s growth rate dipping dramatically,” said Gregory Wetstone, president and CEO of American Council on Renewable Energy, recently told GTM. “At that point, we’re in a world where there are no federal tax incentives of any kind, and virtually every other sector has permanent…tax incentives baked into the code.”