Since it was enacted in 2006, the federal solar investment tax credit (ITC) has helped support the growth of solar energy across the country.
This tax credit allows commercial entities to directly reduce their taxes due by an amount equal to 26% 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% for commercial and utility-scale systems in 2022.
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.
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.
There are two approaches that qualify as beginning construction: incur at least 5% of total project price, or begin physical work of a significant nature on a project.
Incur 5% of Total Project Price
A commercial solar project can say construction began on their project in 2020 if they incur at least 5% of the project cost in 2020. The project cost refers to cost of the portion of the facility that qualifies for five-year accelerated depreciation: panels, racking, and inverters. The requirement for this varies based on the accounting method of the project owner and has specific standards that must be met to ensure safe harbor.
While 5% is the minimum required, Namasté Solar recommends clients purchase the solar panels for a project, which likely accounts for a larger percentage of the project cost. This method allows you to safe harbor your project while also locking in pricing for your panels.
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.
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.
Namasté Solar successfully safe harbored a number of projects in 2019. 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.