Both the Federal and State governments pay for a portion of your solar system when you purchase it. The federal government pays 30% of total gross system cost via a Federal Tax Credit. Depending on your state they will also pay a portion of the system cost in state tax credits. In Arizona for example, the state will pay an incentive of 10% up to $25,000 for any one building. A single business can apply for this incentive twice per year to cover multiple buildings up to $50,000, or $25,000 per building. Depending on the utility there may be rebates which pay for a portion of the renewable energy or battery system.
The Investment Tax Credit (ITC) is currently a 30 percent federal tax credit claimed against the tax liability of residential, commercial and utility investors in solar energy property. The residential ITC allows the business that installs, develops and/or finances the project claims the credit. A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company claiming the credit would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 30 percent of the basis that is invested in eligible property which have commence construction through 2019. The ITC then steps down to 26 percent for projects that begin construction in 2020 and 22 percent for projects that begin in 2021. After 2021, the residential credit will drop to zero while the commercial and utility credit will drop to a permanent 10 percent. Call 480-636-0321 today to learn how much in solar tax credits you can receive with a solar system for your business.
This is great news! Essentially, the IRS has given commercial businesses the opportunity to take full advantage of the 30% tax credit amount for two more years. That’s good news for your finance department that wants to capture the financial benefits on your tax statements to offset your tax liabilities.
The IRS, via Notice 2018-59, has modified the Investment Tax Credit to allow solar projects to begin construction by the end of the 2019, and still get the 30% – versus being in service by that date.
Wikipedia Commons – author Martin Falbisoner, US Capitol, West Side
For all practical purposes, medium- and large-scale solar power projects that expect to take a year to two (or more) for development and construction just got a two year extension on the Investment Tax Credit (ITC).
Meaning that instead of your solar project having to finish by December 31st, 2019, it must now begin (defined below in two specific ways) on or by that date t0 qualify for 30%. This same logic applies to the follow two years and their 26% and 22% tax credits.
The IRS notes that there are two methods for ‘establishing beginning of construction’ – the Physical Work Test or the Five Percent Safe Harbor.
Onsite physical work can take many forms, however, it does include any of the following “preliminary activities”:
(a) planning or designing; (b) securing financing; (c) exploring; (d) researching; (e) conducting mapping and modeling to assess a resource; (f) obtaining permits and licenses; (g) conducting geophysical, gravity, magnetic, seismic and resistivity surveys; (h) conducting environmental and engineering studies
It is notable that manufacturing of hardware necessary to the project that is done off-site counts toward physical work, including assembly of “racks and rails, inverters, and transformers.” However, if those components come from inventory or are normally held in inventory, then they aren’t allowed to be considered “physical work.”
The Five Percent Safe Harbor provision states that construction will be considered as having begun if the taxpayer has paid or incurred – per Treas. Reg. § 1.461-1(a) – 5% of more of the total cost of the project. This does not include land costs.
Keith Martin of Norton Rose Fulbright notes that an equipment or service purchase – a ‘bare payment’ alone – can account for the 5% rule if it is delivered within 31/2 months.
Once work begins, it must keep going – meeting a continuity requirement.
Real world consequences
Also noted by Martin, is that the IRS guidance is not addressed to the directly owned residential solar power market – as this is the corporate focused Investment Tax Credit, and not the Residential Renewable Energy Tax Credit. However, it does apply to third party owned residential solar systems that solar companies lease or use to sell electricity to homeowners.
In the larger commercial and utility scale projects this ruling will absolutely be put into the spreadsheets of financiers at the utilities, which have explicitly stated these solar power tax benefits are driving their decision-making. For instance, in Xcel Energy’s recent long-term plan – which included solar power bids as low as 2.2¢/kWh – the company stated:
Bidders’ ability to take full advantage of the full federal PTC and ITC combined with falling costs for renewable technologies resulted in a robust pool of wind, solar with battery, and solar bids at unprecedented pricing.
This two year window will give investors and utilities reasonable motivation to invest in more projects, even as end of year dates arrive. And this in turn can have repercussions for fossil generation, as Xcel noted that this would allow it to close two coal plants a decade early.
Conversely, there could also be projects whose timelines are extended. For instance, the above Xcel Energy projects could potentially be pushed back up to two years under the expectation of continued declines in hardware pricing for solar panels, batteries and other components.
This article was originally published in PV Magazine on JOHN WEAVER