A version of this article first appeared in the New England Real Estate Journal on November 1, 2019.
Business owners who assume they can’t get a solar energy project going before the 30% federal investment tax credit (ITC) on solar decreases at the end of 2019 will like this news.
Yes, the window on the full 30% ITC is closing, but tax-paying entities can sneak in before it drops thanks to a “Safe Harbor” provision being offered by the Internal Revenue Service (IRS). A gift from the government might seem hard to believe, but this is real.
“Safe Harbor” generally means the government is allowing a variation of a statute or regulation. As you probably guessed, the name suggests protection from a negative situation similar to how a safe harbor shelters ships from bad weather. In the case of solar, “Safe Harbor” means business owners have extra time to qualify for the 30% ITC, if certain conditions are met.
The IRS is offering two methods to qualify for the solar ITC Safe Harbor:
- Pay 5% of the solar energy system’s cost by midnight on December 31, 2019. That entails getting a proposal and signing a contract with a solar developer.
- Begin construction on your solar project in 2019. That entails more steps than the first option, and therefore a bit more lead time.
With the end of the year approaching, you might be focused on closing out the fiscal year, but smart business owners are thinking about solar too. Why? Because the solar tax credit can be worth tens of thousands of dollars. And you can still get the maximum benefit if you contact us today.
Solar ITC Context
Thousands of owners of commercial and industrial businesses across the country, even in snowy New England and Illinois, have put solar energy systems on their roofs and land to improve their financial situations.
The generous ITC is a major factor in solar’s ability to deliver outstanding returns on investment, because it substantially lowers the project cost. This benefit comes in the form of a lucrative tax credit that counts toward what you owe in taxes. (It is not a deduction, which merely lowers your taxable income.)
In addition to the ITC, solar delivers numerous other financial benefits. First, even beyond 2019, solar equipment is eligible for accelerated depreciation on your tax returns through the Modified Accelerated Cost Recovery System (MACRS).
And solar of course lowers your electric bills. If you purchase your system, your solar electricity is essentially free. If you go solar with a Power Purchase Agreement (PPA), you lock in low solar electricity rates for the duration of your contract, which is typically 25 years. With cash or PPA, the value of your solar energy increases over time as utility rates inevitably rise.
But back to the ITC…the ITC was created to support the development of a robust solar industry, and to make it easier for businesses and homeowners to improve their economic situations. Like many government incentives, it is designed to decrease in value over time, because theoretically the price of new technologies decreases as the market matures, so the higher incentive is no longer needed.
At the end of 2019, the ITC drops from 30% of the solar energy system’s price to 26%. A year later, for 2021, it drops again, to 22%.
As any CFO, comptroller, treasurer or accountant knows, a few percentage points difference can effect a dramatic change in a company’s financial outlook. When it comes to solar, that small percentage drop is significant, often translating into thousands or tens of thousands in lost benefit for the business going solar.
If you’re thinking that solar panel prices will continue to drop, and that that will make up for the loss of value from the ITC, we beg to differ. Panel prices have been stable for a few years now. Even if they do drop a little more, it’s unlikely to be enough to offset the 8% drop in the ITC between now and 2022.
More on the Two Options
Before the Safe Harbor provision was established, solar energy systems had to be installed, interconnected to the grid, approved, and in operation before they qualified for the ITC. Under Safe Harbor, taxpayers qualify for the full 30% ITC if they (1) sign a contract with a solar developer, and (2) either start physical construction on their project, or pay 5% of the total cost, by year end.
Your project must then make continuous progress toward completion, without interruption, through commissioning. The IRS allows up to four years to complete the project, and does allow exceptions for delays caused by severe weather, natural disasters, utility interconnection-related delays, and financing delays.
“Physical construction” includes off-site work such as equipment manufacturing, and on-site work such as installing the racking system that supports the panels. In either case, the taxpayer must have a contract signed with a solar developer before this physical work begins. Businesses opting for the 5% down route must have equipment delivered within three and a half months.
In both cases, the ITC is claimed for the tax year in which the solar energy system is turned on.
For Your Accountant
Speaking of tax years, please note that Solect Energy is not a tax advisor or accountant. You should consult with your tax advisor to determine how Safe Harbor applies to your business. Here are two resources that may help:
- Notice 2018-59 establishing the Safe Harbor on the ITC
- A detailed summary of Safe Harbor from Deloitte Tax LLP.
The Gift That Does Not Keep On Giving
While it does take time to put in place the steps necessary to meet Safe Harbor requirements, the full 30% tax credit is well within reach for motivated business owners.
Solar is already practically a gift with its fast payback and generous financial return. Add the IRS Safe Harbor gift to that, and it’s practically Christmas, at least for those business owners who act before New Year’s. After that, the IRS will no longer offer the gift of Safe Harbor and the value of the ITC will decline as intended.
Solect can expedite your system design and financing to get you the full ITC. But time is running out and we can’t do it without you. So call us today.