Distributed Energy Resources

IRS clarifies ITC ‘beginning of construction’ requirements

In a move that clarifies a key solar financing mechanism, the Internal Revenue Service issued guidance establishing when construction must begin for solar and other renewable energy projects to be eligible for certain levels of federal investment tax credits.

The certainty offered by the IRS guidance will make it easier for solar developers to finance their projects, according to the Solar Energy Industries Association. Tax equity investors were balking at financing projects because it was unclear how the tax credits would be treated by the IRS, according to the trade group.

"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," Abigail Ross Hopper, SEIA president and chief executive officer, said Friday after the guidance was issued. “This guidance provides them with a strong timeline for keeping up momentum for new projects.”

The ITC, under tax code section 48, allows the owners of commercial and utility solar projects to deduct 30 percent of their costs for installing solar and certain other renewable technologies from their federal income taxes.

However, under a 2015 law, the tax credit is being phased down for commercial and utility projects that begin operating in 2024 to 10 percent. The tax credit for residential projects is being eliminated in 2022 under tax code section 25D.

The ITC's "beginning of construction" schedule issued Friday matches the same timeline for production tax credit eligibility used by wind projects (IRS notice 2018-59).

Under the IRS guidance, projects that start construction by 2020 and are completed within four years are eligible for the full tax credit.

Projects that start in 2020 can claim a 26 percent ITC and those that start in 2021 are eligible for a 22 percent tax credit, according to the guidance. All the projects must be operating before 2024 to be eligible for the credits. projects that start construction in 2022 or later can receive the 10 percent ITC.

Other technologies that can claim an ITC include fiber-optic solar as well as certain fuel cells and small wind facilities.

The IRS deems construction to have begun if physical work of a "significant nature" has started or if a developer has incurred at least 5 percent of a project's total cost, according to the guidance. Both methods require a developer to make continuous progress towards completion once construction starts.

The two options are nearly identical to the methods permitted by the IRS for PTC projects, according to law firm Stoel Rives.

“While many practitioners and observers believed rules similar to those adopted for the PTC would also apply to the ITC, the IRS’s clarification is welcome news,” attorneys for the law firm said.

The United States has about 56,000 megawatts of installed solar capacity, with about 2,500 MW coming online in the first quarter this year, according to a June 12 report from SEIA. Installations are expected to total 10,800 MW this year, about the same as last year, the trade group said.

SEIA expects installed solar capacity to roughly double in the next five years, with 14,000 MW being added annually starting in 2023.

Voluntary utility solar purchases is the main driver for utility-scale solar, but corporate purchases account for about 10 percent of solar capacity that is under development, according to SEIA.