Install solar and save 30% of your system’s cost from your federal taxes, with no cap. Sounds pretty good, right?
Since 2006, the Solar Investment Tax Credit has provided huge savings to businesses, developers, and homeowners looking to save money and the planet. But all good things must come to an end, and starting in 2020, this tax credit begins to go away.
For homeowners, each year you wait you’re losing out on substantial savings. Businesses, however, have a little more leeway, thanks to the safe harbor provision.
The safe harbor provision allows commercial solar projects to take advantage of 2019’s full 30% tax credit, even if their system can’t be completed until the following year(s).
What Does the Safe Harbor Provision Do?
Rome wasn’t built in a day, and neither are (most) solar systems. Depending on the size of the system, it can take a few days or a few weeks, not to mention the period spent completing paperwork and acquiring permits prior to the project.
Many people are taking full advantage of the tax credit while it’s at its highest - 30%. That means solar installers’ schedules are booked out a bit further than normal. So even if you make the decision to go solar in 2019 and sign the contract, does that mean you’ll get the full 30% even if your project isn’t completed in 2019?
Thanks to the safe harbor provision, you could still receive the full 30% of the tax credit, even if your project isn’t completed in 2019. But there are a few things you need to follow in order to receive 2019’s tax credit rate.
How Do I Comply With the Safe Harbor Provision for Solar?
If you’re a business or farm looking to install a solar system, you can take advantage of the full 30% tax credit in 2019 if your solar system is completed within four years of 2019 (by 2023) and you fulfill the requirements in one of the following two options:
- Option 1: Paying at least 5% of the system’s cost before 2020.
- Option 2: Beginning construction on the project before 2020 and with continuous work (recommended for very large projects only)
Option 1: The 5% Investment
For this option, you must pay at least 5% of the project’s total cost in 2019. The solar installer must use that 5% deposit for legitimate project costs before the stroke of midnight on January 1, 2020. That payment is nonrefundable, even if you decide later on down the road that you do not want to install the system.
What costs could be covered by your 5% investment? They could be anything like engineering; permitting; interconnection fees and applications; utility upgrades or new services; or materials for your system, like racking, inverters, or modules. Which of these options is dependent on the timing, your system, and your situation.
Engineering, permitting, interconnection, utility upgrades, and new services can take some time to complete. If there are only a few weeks left in 2019, it may not be possible to put the necessary work in place. If it is later in the year, it may be possible to purchase products instead. However, solar products will likely be in tight supply, which is why we are doing what we can now to prepare for the demand.
However, there is a downside to using the 5% investment to purchase materials for your system. The customer will be responsible for storing the equipment until the project is installed, which for some businesses, can be a challenge. Delivery of the project is able to be delayed through Mid-March of 2020, however, while still complying with the safe harbor. Which is best depends on your project and situation, as well as how long after 2019 your system will be installed.
In order to satisfy the safe harbor requirements, at least 5% of the system’s cost must be invested in the system prior to 2020. If your project increases in price for any reason, making the money you invested less than 5%, you’ll no longer be eligible for the 30% tax credit. Whether it’s because of factors outside of your control, like tariffs or code changes, or you’d like to redesign your system, the investment made in 2019 must be 5% of the final cost of the project.
In order to ensure you’ll qualify for the safe harbor, you may want to contribute slightly more than 5% in the event the project’s price increases. While 6% or 7% should be safe, it’s a good idea to check with your solar contractor. Regardless of the amount, the payment is not refundable. If you decide to not install your project for any reason, you will lose the investment.
Additionally, be sure that your applications or permits do not expire before the project is built. Make sure you know when your project will be installed, whether that’s within a few months of the New Year, or a year after.
It’s also important to note you could be subject to an audit from the IRS. Make sure you have all of your paperwork in order proving your 5% investment by the end of 2019. Check with your tax professional to ensure all your bases are covered.
Option 2: Beginning of Construction with Continuous Work
This option is most often going to apply to very large projects. It requires two conditions to be met. Work on the project has to be started in 2019, and it has to progress in a continuous nature. That means buying one panel and having your contractor drop it off on your property before 2020 and then not working on your project until 2021 won’t work.
To satisfy this option for the safe harbor, there has to be evidence that some portion of the project has started, whether that’s on-site or off-site work, and that it has continued after 2019. This could include purchasing components specific to your project, beyond what your contractor normally has in their inventory.
As long as the work is significant in nature, it should comply with the safe harbor, but “significant in nature” is up for interpretation. There is no specific amount of work or monetary investment needed to qualify for the safe harbor in this option, though the IRS indicated the taxpayer must make “continuous effort to advance towards completion of the energy property.” Consult with your tax professional for your particular situation.
Option 2 is the trickier of the two options because of its ambiguity. If you rely on this method, you should be prepared to defend the continuity of the project’s work to the IRS, knowing that they’re well-versed on all the explanations. You should also be able to back your claims up with documentation. Because of the difficulties for both the customer and the contractor, many solar installers will advise you two stick with the first of the safe harbor options, the 5% investment.
Slipping up on this could cost you. If a mistake is made, you may not only lose the 4% difference in the ITC, but you could also lose out on the ITC all together and incur expensive professional costs as you work with the IRS.
As long as you partner with a reputable, experienced solar contractor, the safe harbor is a safe and effective way to ensure you’ll be getting the most out of your solar investment. Be sure to consult your trusted tax professional to ensure all your bases are covered before proceeding with the safe harbor.