Jessica PirroSeptember 18, 20192210
One of the biggest solar incentives in the United States is the federal investment tax credit (ITC), which is in the process of winding down. 2019 is going to be the last year for solar energy customers have to claim the full 30 percent solar energy tax benefit. Starting next year, solar energy is going to drop to 26 percent, then another 4 percent in 2021, and then will entirely end in 2022. This impending deadline has prospective solar energy shoppers rushing to take full advantage of the maximum solar energy tax benefit works while they still can - but you can make sure that you are eligible for the 30 percent solar energy tax credit!
Thanks to the “commence construction” guidance outlined by the IRS, there is going to be a bit more flexibility when it comes to claiming the solar energy tax benefit than there has been in the past few years. But, this guidance doesn’t apply for everyone who is getting a solar panel installation. Here are the basics of the commence construction guidance, and what it means for property owners who are looking to take advantage of the 30 percent federal tax credit.
What Exactly does “Commence Construction” Mean?
When it comes to the solar power energy credit, commence construction refers to when you start construction on your solar-powered system. Historically, when it comes to taxpayers only they could claim the federal solar energy tax benefit in their year this solar-powered system was placed in service, after obtaining permission to operate (PTO). When Congress decided to extend the credit in 2015, they determined that certain solar-powered system owners would be able to claim the credit in the year that the construction began the project.
Who is Eligible for Commence Construction Benefits?
The IRS’ commence construction applies to all solar energy projects that are looking to take advantage of the business solar energy tax benefit: but, the commence construction provisions and the related IRS guidance doesn’t apply to the residential solar power energy credit.
The ITC relates to two different solar power energy credits: the section 48 credit and the section 25D credit. The section 48 credit is intended for solar-powered systems that are owned by a corporation, such as utility-scale solar panel installations, commercial solar panel installations, or third-party-owned residential solar panel installations (this is when leasing companies such as SunRun or Vivint can claim the solar power energy credit). On the other hand, the section 25d solar power energy tax credit which is only a directly-owned, residential solar-powered system, allowing taxpayers to claim the solar energy tax benefit in their tax returns.
If you are planning on getting a residential solar panel installation and want to claim the 30 percent solar energy tax benefits you're yourself, if you have the system fully installed and operational before the end of 2019 is your safest bet for ensuring that you can get the maximum solar energy tax benefit. But as it goes with any tax incentive, it is recommended that you consult with a tax professional on this matter, as they are the ones who are best suited to give formal tax advice.
The Commence Construction Guidance
As “commence construction” pertains to the solar energy tax benefit, it isn’t always going to be clear as to what constituted as the beginning of construction. The lack of clarity left many people who are in the solar energy industry, particularly solar power developers and commercial property owners, concerned about the step-down and worrying about how uncertainty over the definition of the “commence construction” clause would impact the economics of the potential solar-powered system. But in June 2018, the IRS published clearer guidance regarding the solar power energy credit.
The IRS states that solar energy projects eligible for solar energy tax credit value for the year they “commence construction,” and there are two different tests to determine whether construction has started for a solar energy project: the Physical Work Test of the Five Percent Safe Harbor Test.
Physical Work Test
The Physical Work Test states that if the physical construction starts on your solar energy project before the end of 2019, you’re eligible for the 30 solar energy tax benefit. But, not every type of work passes this test; according to the the IRS, the work needs to be physical of a significant nature. There are many on-site tasks for installing solar-powered systems, affixing mounted equipment, installing solar panels, or solar power inverters) meet this requirement. Off-site tasks, such as permitting, interconnection paperwork, system design, preparing a property for solar panel installation, like tree removal, and re-roofing, don’t qualify.
Five Percent Safe Harbor Test
If a solar energy project beginning in 2019 doesn’t pass the Physical Work Test, the solar energy project might still be eligible for the 30 percent solar energy tax benefit depending on how much money has already been invested in the project, those who start construction in 2019 and spend 5 percent nor more of the total solar-powered system costs before the end of the year can claim the 30 percent solar energy tax benefit.
The Other Rules
Most Importantly, you can’t simply start you solar energy project in 2019 in order to meet the Physical Work Test or Five Percent Safe Harbor Test only to stop your construction: you will need to continuously make progress on the solar energy project and be able to provide proof that they progress, like regular payments on your solar-powered system. Additionally, your solar panel installation needs to be up and running by December 31, 2023, at the latest if you are to claim the full solar power energy credit.
Claim Your Solar Energy Tax Benefits As Soon As Possible
If you want to get the 30 percent solar energy tax benefit you are going to want to sign up for solar panel installation. You can see how much you can save by going to HaHaSmart and using the price checker tool.
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