Why You Should Take Advantage of the 30% Tax Credit Before 2020 Comes Around

Why You Should Take Advantage of the 30% Tax Credit Before 2020 Comes Around

This article is intended to give you information you should be aware of in regards to the solar tax incentive and its decline over the next 3 years. In order to take advantage of the 30% Federal tax credit, you will have to install your solar panels by the end of 2019. At the beginning of 2020, the tax credit will decrease by 4% down to 26%, which could mean a substantial amount of savings, dependent on the size of your system.

Any professional solar panel company should know everything having to do with the Investment Tax Credit (ITC), and the benefits that come with it for you as the consumer. The enactment of the ITC was the intended to allow those with solar energy projects to take advantage of a 30% tax credit on a cost basis of their qualified energy property in the year it was first put into service.

Back in 2015, when the ITC’s original 30% was about to expire, Congress approved the Consolidated Appropriations Act of 2015. This extended the 30% ITC for all residential and commercial projects up until the end of December 2019. Beginning 2020, it would go down to 26%, then drop to 22% at the beginning of 2021. The start of 2022 meant that the remaining 10% tax credit would remain intact only for commercial projects. The extension of the ITC tax credit also stated that the requirement for the qualification of a solar panel project only needed to commence instead of it being in-service. The IRS states that in order for a project to fall under the “commence construction” phase, it must fall in to the following two steps:

  1. PHYSICAL WORK TEST: SECTION 4.02-.04: “The Physical Work Test requires that a taxpayer begin physical work of a significant nature.  This test focuses on the nature of the work performed, not the amount or the cost.” This work performed can include the installation of racks or other various structures to attach PV panels, collectors, or solar cells to the site (4.02.2.A).  This does not include any preliminary activities such as planning or designing an array design, obtaining permits or licenses, securing financing, the clearing of a site, or conducting geophysical/environmental/engineering surveys of the site (4.03). It is important to note that physical work also does not include the effort involved in producing “the components of the energy property that are either in existing inventory or are normally held in inventory by a vendor.”
    1. Continuous Construction Test (Section 6): “Involves continuing physical work of a significant nature. Whether a taxpayer maintains a continuous program of construction to satisfy the Continuity Requirement will be determined by the relevant facts and circumstances.”
  2. FIVE PERCENT SAFE HARBOR: SECTION 5. 01-.02: “Construction of energy property will be considered as having begun if: (1) a taxpayer pays or incurs 5% percent or more of the total cost of the energy property, and (2) the taxpayer makes continuous efforts to advance towards completion of the energy property” (5.01).  Meaning that the estimated total of all costs of the energy venture in question are taken into account when trying to evaluate whether or not the Five Percent Safe Harbor standard has been established.  This total does not include the price of the land intended to house the energy property.
    1. Continuous Efforts Test (Section 6): “Whether a taxpayer makes continuous efforts to advance towards completion of an energy property to satisfy the Continuity Requirement includes, but is not limited to: (a) paying additional amounts included in the total cost of the energy property; (b) entering into binding written contracts for the manufacture, construction, or production of components of property or for future work to construct the energy property; (c) obtaining necessary permits; and (d) performing physical work of a significant nature.”

A couple of questions have been asked in regards to satisfying these two requirements:

  1. “Is it necessary for me to complete both these two steps before January 1, 2020 in order to satisfy the requirements necessary to receive the 2019 tax credit?”
    1. Looking at section 3.02 of the IRS Notice 2018-59, it states that while you must implement both these steps for your solar project to qualify, the construction will be considered started on the date the taxpayer first establishes the first of the two steps listed above. Here is an example:
      1. “For example, if a taxpayer performs physical work of a significant nature on [the] energy property in 2018, and then pays five percent or more of the total cost of the energy property in 2019, construction will be deemed to begin in 2018 under the Physical Work Test, not in 2019 under the Five Percent Safe Harbor” (Section 3.02).
    2. “Is it true that I have 4 years to complete my energy project and still apply for the ITC credit level of the year in which I first “Commenced Construction”?”
      1. There is an article by McDermott that technically says the answer to this question is yes, however, this notice clarifies that after a commercial project has been approved for the ITC (aka the taxpayers have been able to purchase equipment equal to 5% of anticipated project costs and passed the Physical Work Test) in 2019 it will permit projects placed in service up until January 1st, 2023 to qualify for the ITC at the current 30% rate from 2019.  Although it is important to note that construction and significant payments of the energy property must continue throughout this 4 year time period to remain in good graces for the Continuity Safe Harbor.
      2. “If a taxpayer places an energy property in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the energy property began (“the Continuity Safe Harbor Deadline”), the energy property will be considered to satisfy the Continuity Safe Harbor.  For example, if construction begins on an energy property on January 15, 2018, and the energy property is placed in service by December 31, 2022, the energy property will be considered to satisfy the Continuity Safe Harbor (Section 6.05).”

Therefore, based on all the information from the IRS Report 2018-59 to claim the 30% ITC this year all you have to do is:

  1. Make a 5% payment on the total cost of the solar panel system along with a written contract that guarantees the continuous development of the solar panel system, or begin physical work of a significant nature in regards to the installation process (ie. “racking or other structures to affix PV panels, collectors, or solar cells to a site”) before January 1st, 2020.

Our advice is to claim your tax credit now and don’t wait until next year or you risk part of the 30% tax credit.

Note: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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