Safe Harbor: Claiming an “Early” Tax Credit for Commercial Solar

April 01, 2020

By 2022, the federal investment tax credit (ITC) for installing a home solar system, a real help in paying for residential solar, is coming to an end.

But if you’re creating a commercial solar setup, there’s a way to “lock in” 2020’s 26 percent credit, even if your system won’t be switched on until 2021—or keep 2021’s 22 percent ITC on a system scheduled to become operational in 2022, when the ITC program “sunsets.”

It’s called Safe Harbor, and it’s an agreement with the IRS in which you show that you’ve “begun construction” on the system during the tax year previous to the year in which you will switch the system on.TaxIncent_SafeHarbor

There are two ways to claim safe harbor:

  1. If, according to the IRS, “physical work of a significant nature” started in 2020. Both on-site and off-site work can apply, and can be performed by the project’s owner, by a contractor, or by a subcontractor. But a contract has to be in place that demonstrates assumption of risk.

  2. If you incur at least 5 percent of the project’s cost in 2020.

Continuous Progress

IRS regulations state that “both methods require that a taxpayer make continuous progress towards completion once construction has begun.”

So:

  • If you’re claiming that physical work began in 2020, you need to also show that the work has continued without significant interruption through the tax year.

  • If you’re taking the 5-percent-of-cost option, you have to prove “continuous efforts” toward completion through the year, and that can include non-construction measures. For example, entering into contracts (for the manufacture, construction, or production of components or for future work to construct the system) or obtaining permits. Performing physical work of a significant nature, as in the other option, is another way to show continuity of effort.

You’ll want to consult with your solar provider and your tax professional before making any decision about the solar ITC, especially whether or not it’s possible and in your best interests to claim safe harbor.



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Solar Tax Incentives Explained, to learn more about the financial assistance offered and why it's important to act as quickly as possible! eBook_CTA_TaxIncentivesExplained

 

 

Categories: Financial