IRS Modifies Tax Credit Guidance for Solar Projects

IRS Modifies Tax Credit Guidance for Solar Projects

The Internal Revenue Service (IRS) released guidance, modifying its requirements for solar projects to receive tax credit, in June. Prior to the modification, energy property was required to be placed in service before January 1, 2016, or January 1, 2017, depending on the type of energy property. Now, construction of energy property must begin before January 1, 2022. This modification has the effect of retroactively extending by five years, according to the guidance. For developers interested in working on solar projects that rely on tax credit, it is recommended that they work with an experienced attorney or consultant.

Nine things to take into consideration when looking to meet the requirements for tax credit on a solar project:

  • The same general principles that apply to wind farms will also apply to solar projects, according to the IRS.
  • The guidance also includes qualified fuel cells, combined heat and power system (CHP), geothermal heat pumps, and wind farms using small turbines of 100 kilowatts or less.
  • Physical work at a factory or by a construction contractor at the site must not begin until a binding contract is in place to have the work done.
  • Work on components at a factory does not count if the components are a type that the manufacturer normally keeps in inventory. For fuel projects, installation of a fuel cell stack assembly is significant. For geothermal, installation of “piping”, flash tanks, or heat exchangers is enough. The physical work must be on equipment that is “integral” to generating electricity. Preliminary activity, such as clearing a site or removing existing equipment, does not count.
  • The alternative to breaking ground before the deadline is to incur at least 5% of the total project cost before the deadline. Most developers try to incur at least 7% of the project cost in order to provide a safety margin in case there are cost overruns. However, this is not a guarantee.
  • It is not enough to have started construction in time. There must also be continuous work on the project after the year in which construction started. The IRS said it would not make developers prove continuous work on projects that are completed within four years, according to the guidance.
  • Breaks in continuous work for reasons that are outside the control of the developer are excused. Examples include severe weather conditions, natural disasters, delays in obtaining permits, and interconnection-related delays.
  • The IRS will not issue private letter rulings confirming that projects were under construction in time so developers need to keep records to present to tax equity investors.
  • Re-powering of older projects may allow a developer to qualify for a tax credit on the repowered facility. But, the developer would have to spend an amount on the repowering that would be considered enough to have built a new facility.

To read more on Investment Tax Credits, read our article Renewable Tax Credit Equity Market- Growing but Uncertain