The Internal Revenue Service released guidance establishing when construction starts for solar projects under tax law, allowing developers to invest with confidence in new solar projects.
“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,” Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association (SEIA). “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.”
The guidance, Notice 2018-59, provides two methods to establish when construction of a solar facility starts to qualify for the solar investment tax credit (ITC):
(1) starting physical work of a significant nature or
(2) meeting the ‘five percent safe harbor test’ (i.e., paying or incurring five percent or more of the total cost of the facility in the year that construction begins).
• The guidance helps determine when construction has begun on solar energy property that is eligible for the § 48 investment tax credit (ITC). A taxpayer may establish the beginning of construction by starting physical work of a significant nature (Physical Work Test), or by meeting a safe harbor based on having paid or incurred five percent or more of the total cost of the energy property (five percent Safe Harbor).
• Both methods for establishing the start of construction require that a taxpayer make continuous progress toward completion once construction has begun (the Continuity Requirement).
• The Continuity Requirement for the Physical Work Test requires the work to continue with limited exceptions until completion. The five percent Safe Harbor is broader and permits additional work, spending, or other efforts to satisfy that test.
• In either case, if a taxpayer places an energy property in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the energy property began (the Continuity Safe Harbor Deadline), the energy property will be deemed to satisfy the Continuity Safe Harbor. However, if an energy property is not placed in service before the end of the fourth calendar year after the calendar year during which construction of the energy property began, whether the energy property satisfies the Continuity Requirement under either the Physical Work Test or the Five Percent Safe Harbor will be determined by the relevant facts and circumstances.
• There are several nuances which will require further consultation with industry participants but, on balance, the guidance is very positive and will give the industry the certainty that it needs to move forward with confidence on solar projects.
“In the absence of this commence construction guidance, tax equity partners were growing cautious about project risk,” Hopper continued. “Solar projects are helping modernize and secure our energy infrastructure, creating jobs and bringing clean energy to communities around the United States. 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.”
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