IRS Clarifies ‘Begin Construction’ Guidance for Solar Tax Credit

Anthony Clemons
By Anthony Clemons

In a letter to Assistant Treasury Secretary David Kautter, two U.S. senators requested the IRS issue guidance on what “beginning of construction” means for organizations pursuing an income tax credit for solar construction. The IRS complied, issuing the long-awaited clarification of an IRS policy that comprehensively defines when solar construction projects are acknowledged to begin. This guidance comes two years after the IRS clarified similar guidance for wind power sites.

The Jun. 7 letter from Senators. Maria Cantwell, D-Wash., and Dean Heller, R-Nev., makes a bipartisan appeal for the Treasury Department to clarify the “beginning of construction” language for properties pursuing a credit. The clarification request extends from the wind and solar tax credits guaranteed by the 2016 Consolidated Appropriations Act.

Following the passage of the bill in December 2015, the IRS issued Notice 2016-31, defining the evaluative standards for when wind, hydropower, geothermal and biomass trash facility projects are understood to “begin construction” but had not yet issued similar guidance for projects using solar energy. “The need for certainty is particularly important in the case of utility-scale projects, which, given their scale and cost, have significantly longer planning horizons,” Sens. Cantwell and Heller wrote.

The merit behind the tax credit guidance

The senators’ condition for certainty is not without merit. Based on guidance from the 2016 Consolidated Appropriations Act, allowable tax credit percentage rates for solar projects are determined by the year a project’s construction begins, with a concurrent requirement for the solar project to be placed “in service” before Jan. 1, 2024. Permitted tax credit rates then steadily decline up to 20 percent for projects beginning after Jan. 1, 2020. The division of rates are as follows: projects beginning up to Jan. 1, 2020, have an ITC rate of 30 percent, in 2020, 26 percent, in 2021, 22 percent and any project after 2021, irrespective of when it is put into service, the ITC rate is 10 percent.

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Without clarifying the “beginning of construction” evaluative standard, firms are struggling to develop project timelines that allow them to maximize their eligible tax credit rate, forcing them to leave significant savings in tax incentives on the table. They are then left vulnerable to incur greater costs at no fault of their own.

Both senators agree that the absence of the IRS guidance unnecessarily hinders solar energy development by placing “undue financial risk” on companies that are bidding or planning to bid on construction projects that could begin in 2019.

In response, the IRS issued Notice 2018-59 Jun. 22, clarifying the “beginning of construction” language in Section 48 of the Internal Revenue Code. Using similar guidance from a notice pertaining to utility scale wind projects, Notice 2018-59 necessitates two evaluative standards for assessing when construction begins on a solar project seeking to qualify for a tax credit: (1) engaging in significant physical work through either direct or contract “Physical Work Methods” or (2) achieving the “Five-Percent Safe Harbor” standard, whereby five-percent of the ultimate tax basis of the project is paid or incurred.

Specific tax guidance helps

Though both standards correlate to similar IRS notices, the guidance in this notice offers solar-specific examples that illustrate what work of a significant nature might be for different types of energy properties. The notice further clarifies what preliminary activities do not qualify as work of a significant nature. The notice’s safe harbor qualification standard also delivers a boon for firms intending to purchase equipment equal to five-percent of anticipated project costs by permitting them to qualify for the current 30 percent tax-credit rate in 2019, permitted the projects are placed in-service through 2023.

Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association, lauded her association for its lobbying efforts and emphasized the importance of the IRS issuing the guidance.

“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. 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,” Hopper said.

With the new IRS guidance in place, investors and developers seeking to begin construction on new solar projects have the clarification necessary to develop requirements and project timelines, thus increasing their likelihood of qualifying for the 30 percent tax credit beyond 2019. The guidance also increases the likelihood of new equipment purchases for firms seeking to qualify under the “Five-Percent Safe Harbor” standard, promoting economic growth within the sector.

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Anthony Clemons grew up in the coalfields of Matewan, W.Va. He commissioned as an Army officer and served in Afghanistan and Kuwait. A graduate of Teachers College, Columbia University, he has written about culture in adult education. He is a dual M.F.A/M.A. student at Goucher College studying Nonfiction Writing and Cultural Sustainability.