On June 22, the IRS issued Notice 2018-59 providing a beginning construction standard for solar projects similar to the standard previously set for wind projects. Solar developers now have a standard for reliance on what constitutes the start of construction in order for a project to qualify for the investment tax credit (ITC). This written guidance from the IRS provides solar developers and investors the certainty they have been lacking on initial qualification for the ITC. The ITC for solar projects that have begun construction before January 1, 2020, and are placed in service before January 1, 2024, remains the full 30 percent of basis before being phased down to 10 percent for projects that begin construction on or after January 1, 2022.
The notice establishes two methods for beginning construction:
- The Physical Work Test – Physical work of a significant nature
- The Five Percent Safe Harbor – Meeting a safe harbor based on having paid or incurred five percent or more of the total cost of the energy property
Both methods require continuous progress toward completion once construction has begun, but there is also a safe harbor for meeting this continuity requirement, which states that a taxpayer is deemed to have met the continuity requirement if the property is placed in service within four calendar years after the year construction began.
The notice provides examples of work that would meet the Physical Work Test including: installation of racks or other structures to affix photovoltaic panels, collectors or solar cells to a site, and manufacture of components, mounting equipment, support structures, inverters, and transformers and other power conditioning equipment.
The notice also provides more detailed information on what constitutes energy property, the requirements for aggregation of projects, and the effects of transfer of energy property.