With the Trump administration pulling out of the Paris Climate Agreement and scuttling the Clean Power Plan, many in the solar industry wonder whether the schedule of the Investment Tax Credit phase-out for solar projects will be changed.
A number of renewable energy experts say the answer is no; the administration is not expected to alter the ITC phase-out schedule.
But, they add, industry players and their customers should familiarize themselves with the phase-out schedule, the “Five Percent Safe Harbor” clause, and the “begin construction” rules.
“The solar Investment Tax Credit (ITC) is one of the most important federal policy mechanisms to support the deployment of solar energy in the United States,” says the Solar Energy Industries Assoc. on its website.
Because it’s not so easy deciphering the details of the rules, it’s critical that solar developers and investors acquaint themselves with this information as soon as they begin to plan projects. For example, under the “Five Percent Safe Harbor” clause, developers must spend a minimum of 5 percent of capital costs before the end of the year to qualify for current-year subsidies. If that doesn’t happen, they may lose the opportunity to be eligible for higher ITC levels because the ITC steps down over a number of years.
What does this mean for you, the investor, developer or customer? Here’s an example:
Let’s say you’re investing in a $3 million solar system. About 30 percent—or $90,000– is eligible for the ITC this year, explained Tony Clifford, chief development officer, Standard Solar.
Under the safe harbor clause, if you want to claim the ITC this year, and get the full 30 percent, you need to show you have done something substantial to earn that credit, and then you are “safe,” and can rest assured you are eligible for that credit, he added. To do this, you need to establish that construction has begun.
“Typically incurring at least 5% of the cost of the system and completing the project in a certain number of years provides safe harbor in the view of the IRS…The idea is that if you started a project late in 2016 but couldn’t finish until 2017 or 2018 that you could still get the credit if you could show substantial progress being made toward that project,” he said.
While you’re familiarizing yourself with the details of the ITC, you might want to celebrate the fact that the solar industry isn’t expected to suffer much from the new administration’s moves. That’s because states are boosting their renewable energy goals and businesses are turning to renewable energy to lower their carbon footprints and insulate them from blackouts.
“Although the Clean Power Plan is pretty much dead, it is encouraging to see that states are already proceeding with their own policies as if those federal requirements are still in effect,” said Bruce Hamilton, director of Navigant Research’s energy practice. His company’s research has shown that the ITC’s phase-out schedule is expected to remain intact.
The ITC and PTC extension dates back to 2015. In December 2015, Congress enacted a five-year extension of renewable energy tax credits for solar (and other renewable energy technologies) as part of an omnibus spending bill.
The bill extended the ITC for solar until 2019. It was originally scheduled to sunset at the end of 2016.
The ITC is a 30 percent federal tax credit that can be claimed against the tax liability of residential and commercial investors in solar energy property.
“The Section 25D residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when homeowners purchase solar systems outright and have them installed on their homes. In the case of the Section 48 credit, the business that installs, develops and/or finances the project claims the credit,” explains SEIA on its website.
A tax credit is a dollar-for-dollar cut in the income taxes that a person or business would otherwise pay the federal government. It is based on the amount of money invested in solar property.
The solar PTC is no longer available for projects beginning construction after Dec. 31, 2016. Previously it was available as an alternative to the ITC, but was usually not as attractive as the ITC.
For residential projects, the ITC is 30 percent of the cost basis for projects started in 2017, 2018 and 2019. For projects started in 2020, the amount is 26 percent, and 2021, it’s 22 percent, and 0 percent in 2022, according to Hamilton.
For commercial/industrial/utility-scale projects, the phase-out schedule is: 30 percent of the cost basis for projects started in 2017-2019; 26 percent in 2020; 22 percent in 2021 and 10 percent in 2022.
After the ITC was extended, the IRS clarified and expanded on the “Five Percent Safe Harbor” clause, explaining when developers should begin construction in order to qualify for the ITC and PTC “beginning of construction” guidelines.
Projects are eligible for the current-year subsidies if the developer or owner spends a minimum of 5 percent of the project’s total capital costs before the end of the year, said Dexter Gauntlett, principal research analyst for Navigant’s energy division.
Under this clause, developers don’t have to break ground in order for the project to have “started construction.”
An alternative method of meeting the requirements is via the “Physical Work Test,” which lays out construction work that is significant enough to qualify developers for the credits.
“The Physical Work Test requires that a taxpayer begin physical work of a significant nature. As provided in section 3 of Notice 2014–46, this test focuses on the nature of the work performed, not the amount or the cost,” said the IRS in a bulletin about the issue, which includes physical work examples in a few renewable energy industries.
“Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test,” the IRS said.
Taxpayers can’t rely on the Five Percent Safe Harbor and the Physical Work Test in alternating years to meet the beginning of construction requirement, the IRS noted.
The projects must be up and running within four years.
The IRS has clarified some of the guidelines and rules associated with the ITC and PTC a number of times. For this reason, it’s critical to communicate regularly with manufacturers, vendors and other parties to ensure a project meets the requirements and does indeed benefit from the ITC.
As Deliotte says in a summary of the “begin construction” rules, “No details are minor, and no questions are unimportant in the efforts to begin construction and remain compliant with the PTC and ITC.”
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