Federal Tax Credit for Solar

One of the biggest perks of solar energy is the Federal Tax Credit available upon its installation. At the moment, solar projects get a 30% federal tax credit, but this is changing. While the credit available will always make implementing solar worthwhile, the money saved from doing so is going to decrease with time. After December 31st, 2019, the Federal Tax Credit for installing solar will decrease to 26%. Every year there will be a stepdown on tax credit (Figure 1). The only requirement to take advantage of the current 30% tax credit is to start construction for the solar project by December 31st. To secure the maximum tax credit, learn about installing solar now and get a headstart on your project. *

You may be asking yourself: What qualifies as “begin construction” for a solar installation? The Guidance, an IRS report of rules, offers two methods to determine ”begin construction:” The Physical Work Method and the Five Percent Method.

The Physical Work Method is exactly what it sounds like, starting the physical work of construction. The construction that is done has to be “integral to the production of electricity.”[1] This method can be fulfilled by off-site components, including the manufacture of “mounting equipment, support structures such as racks and rails, inverters, step-up transformers and other power conditioning equipment,”[2] or on-site work through actions that include “the ‘installation of racks or other structures to affix photovoltaic panels, collectors or solar cells to a site.’”[3]

There are two conditions you must meet for the Physical Work Method. The first is that manufacturing items that are “in ‘inventory or are normally held in inventory by a vendor’”[4] do not qualify as begin construction components. The manufacturing items must, therefore not be “normally held” by a vendor. Secondly, the parts of the project that are not being completed by the taxpayer must be done through a completed binding written contract, under state law, before construction begins.[5] Thus, a fully-executed Engineering, Procurement and Construction (EPC) Agreement must be signed.

The Five Percent Method requires that the taxpayer has paid at least five percent of the project’s cost in order to have “started construction.”[6] According to the Code, “only costs included in the depreciable basis of the project are taken into account.”[7] In addition to this, “only costs incurred with respect to property integral to the production of electricity are considered.”[8] Lastly, a difference between this method and the Physical Work Method is that “costs paid or incurred with respect to property that is in inventory or normally held in inventory by a vendor, such as solar panels, would count toward satisfaction of the Five Percent Method.”[9] To help conceptualize the Five Percent Method, take a $1 million project for example, If five percent, $50,000, of the $1 million project is spent on qualifying expenditures, the project would qualify as starting construction.

These two methods allow for plenty of time to benefit from the full 30% tax credit. Talk to your accountant, choose the method that works best for you, and get started on your solar project. Breaking ground on your solar project in 2019 will save you more. There will still be opportunities to save in the future, but why miss this window for greater savings? The financial benefits of switching to solar are not going away.

*Disclaimer: This is not an attempt to give tax advice. Please check with your accountant before making any financial decisions regarding solar energy.

[1] Burton, David K., Jeffrey G. Davis, and Isaac L. Maron. “Beginning of Construction Guidance for Solar and Other ITC Technologies.” Taxequitytimes.com. https://www.taxequitytimes.com/2018/06/beginning-construction-guidance-solar-itc-technologies/ (accessed April 4, 2019).

[2] Ibid

[3] Ibid

[4] Ibid

[5] Ibid

[6] Ibid

[7] Ibid

[8] Ibid

[9] Ibid

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