By John Shaw, Commercial & Industrial Solar Developer at Namasté Solar
Since it was enacted in 2006, the federal solar investment tax credit (ITC) has helped support the growth of solar energy across the country by more than 10,000 percent, according to the Solar Energy Industries Association.
This tax credit, as opposed to a deduction, allows commercial entities and homeowners to directly reduce their taxes due by an amount equal to 26 percent of the solar project price in 2020. The tax credit will step down over the next two years and will sunset to a permanent 10 percent for commercial and utility-scale systems in 2022 and to 0 percent for residential systems.
In order to secure the higher 2020 tax credit, a commercial project needs to either be placed into service by Dec. 31, or safe harbored by taking certain steps for projects that won’t be completed by the end of the year. Let’s dig into the concept of safe harbor and how to ensure eligibility for the 26 percent solar tax credit before it steps down to 22 percent in 2021.
What is Safe Harbor?
The IRS established a provision to the ITC tax law called safe harbor which allows commercial customers to preserve the tax credit of the current year by beginning construction on a solar project. The definition of what beginning construction means is at the heart of safe harbor and is what a prospective solar buyer should be aware of in considering a safe harbor strategy.
There are two approaches that qualify as beginning construction. The first safe harbor strategy is to incur at least 5 percent of total project price, and the second is to begin physical work of a significant nature on a project. Both are considered acceptable proof of beginning construction on a project.
Incur 5% of Total Project Price
A commercial solar project is considered to have begun construction if at least 5 percent of the project price is incurred on qualifying equipment such as solar panels, racking, and inverters. Verification requirements for equipment purchases vary based on the accounting method of the taxpayer, but in general, title transfer must occur within the given year to qualify.
To safeguard against price fluctuations and because some items are custom to a project that has yet to be fully designed, the cleanest way to achieve safe harbor is to take title of the solar panels – about 20 percent of project price.
Begin Physical Work of a Significant Nature
The term “physical work of a significant nature” refers to evidence that work has started on something qualitatively significant. Both on-site and off-site work is considered acceptable and can be performed by the project owner, a contractor, or a subcontractor. Either way, a binding contract must be in place that demonstrates a commercial entity’s assumption of risk. This option also refers to the procurement of components specific to the project which are not normally held in the manufacturer’s inventory such as custom racking, carports, and transformers. However, since the phrase “significant nature” is a somewhat nebulous term, we find that the simplest, safest means to achieve safe harbor is typically by buying the panels.
Safe Harbor Your Project
The best safe harbor strategy will depend on the individual characteristics of your project and the advice of your tax professional. It is important to evaluate your options and determine which strategy is the best course of action for you to ensure that you secure the maximum tax credit for your project.
Namasté Solar successfully safe harbored a number of projects in 2019. We will work with you to identify project goals, timelines, and milestones, as well as your company’s financial position, accounting method, and risk profile to help you reach your ultimate solar savings. To learn more about safe harbor or to find out if solar is right for your property, contact one of our non-commissioned solar advisors at Namasté Solar. We love connecting with our Colorado community to discuss the best renewable energy route for each individual or entity.
This content is sponsored by Namasté Solar