A Basic Guide to Renewable Energy Market and Energy Tax Basics

So What’s The Quick But Not Dirty?

The IRS finally issued IRS Notice 2018-59 Beginning of Construction for the Investment Tax Credit under Section 48 on June 22, 2018.  For non-tax geeks, this is guidance to help developers of solar facilities show they have “begun construction” and thereby show the project qualifies for the investment tax credit (ITC).

Why Does It Matter?

Well, the ITC is a big deal for the solar industry and the IRS is not just going to give tax credits away because it is like giving money away.  In general terms (i.e. let’s move away from tax nuances for a second), these tax credits help reduce the recipient’s ultimate tax liability by reducing dollar for dollar the amount of taxes it owes.  As a result, the IRS is going to stipulate what needs to be met to qualify for this particular tax credit.  For the solar industry, beginning construction is one of those requirements and, for the longest time, the only guidance available on what that meant was for the wind industry (the IRS has issued six sets of guidance on production tax credit context since 2013—see our “Got ITCs?” article here.

What Are the Important Details To Remember?

No surprises here in that the solar construction guidance largely follows what has been available for the wind and production tax credit.  So here is what you need to remember:

• You can show the IRS that construction has started in one of two ways: (i) Five-Percent Test or (ii) Physical Work Test
• Under the Five-Percent Test:
  • Project owner needs to incur at least 5% of the project’s cost prior to construction start deadline. The project’s cost is based the part of the facility that qualifies for 5-year accelerated depreciated, which generally comes down equipment necessary to generate the facility. 
  • Note this test is the practically easier of the two options (compared to the wind sector) and will be easier to show to investors/lenders, since it is the most objective test. It likely costs more though.
• Under the Physical Work Test
  • Project owner needs to show that construction has “started”. This generally means you’ll need a binding construction/fabrication contract and physical work needs to happen under that contract on an integral part of the equipment.
  • Note that manufacturing work on solar panels or inverters will not count for this.
• Deadlines to Begin Construction In Order to Qualify for ITC Credit
  • December 31, 2019 – 30% ITC (project needs to be placed in service by end of 2023)
  • 2020 – 26% ITC (project needs to be placed in service by end of 2023)
  • 2021 – 22% ITC (project needs to be placed in service by end of  2023)
  • 2022 or later – permanent 10% ITC

For Further Reading

Energized for more information regarding IRS guidance for beginning of construction for solar facilities?  Please read our more thorough analysis “Solar Start of Construction Guidance, a Comprehensive Analysis” here.