New IRS guidance aligns solar "start of construction" with standard for wind

Blog Post
Since its inception in 2006, the investment tax credit for solar energy development has played a critical role in the solar power industry’s meteoric rise. In sixteen short months, though, we enter the phase-down period, wherein the ITC will drop incrementally from its current 30 percent (through 2019) to a permanent 10 percent (after 2022). As equipment prices have plunged and market penetration has soared, the solar power industry will undoubtedly continue to expand without the full benefit of the ITC as it stands today.

However, solar developers are still anxious to maximize the benefits of the ITC prior to, and during, the phase-down period, and new guidance issued by the IRS back in June eased much of that anxiety. In Notice 2018-59, the IRS explained how each ratchet tooth of the phase-down process – 30 percent through 2019, 26 percent in 2020, 22 percent in 2021, and 10 percent thereafter – will be applied to projects that infrequently move from conception to commercial operation in the same calendar year. 

Appearing to borrow heavily from existing guidance for wind power systems, the new solar guidance applies the ITC rate for the year in which the project commences construction, which is defined to occur when the developer has (1) engaged in significant physical work on the project, or (2) paid or incurred 5 percent of the total tax basis of the project. In order to qualify for the ITC rate of the year in which the project commences construction under those definitions, though, the project must be completed within four years or face strict scrutiny from the IRS as to whether the project was under continuous construction. This four-year window is among the most generous of the criteria borrowed from the wind power guidance, and allows solar developers to take advantage of earlier years’ more lucrative ITCs for four years, despite solar projects generally requiring much less time to construct than their wind-powered counterparts. In other words, a developer could install racking or purchase 5 percent of the requisite materials for all of its projects that will be completed by 2023 in 2019, and still claim the 30 percent ITC on each of those projects. 
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