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How to Safe Harbor your commercial solar project and secure your 30% tax credit

At Ipsun, we’re here to help your business have a great solar journey, which includes making the most of your tax credit. 

***This post has been updated to reflect the most current information about federal tax credits and safe harbor. Now that the ITC has been extended at 30% through 2032, safe harbor will be less of a concern for all except large, long-term projects. For the most up-to-date information about the Federal Solar Tax credit, see our incentives page at ipsunsolar.com/solar-incentives

For commercial solar projects, the end of the year means it’s time to get busy. If you’re planning a project for your commercial building and plan to own the equipment rather than use a PPA, C-PACE or other third-party finance, now is the time to make some decisions so that you can take advantage of the 30% federal solar investment tax credit (ITC).

What is the federal solar ITC?

The Energy Policy Act of 2005 created the ITC and originally included a 30% tax credit on solar projects, as well as tax credits for wind power and other clean energy technologies. It was meant to give the renewable energy industry a boost, but it has done much more than that.

The ITC has been one of the most effective pieces of climate legislation in effect since its inception. It has created hundreds of thousands of jobs and invested billions of dollars into the US economy. In fact, according to the Solar Energy Industry Association (SEIA), the solar industry has grown by more than 10,000% since 2006.  Read more about the ITC here, and learn more about the extension of the ITC through the Inflation Reduction Act here. 

Commercial Solar ITC step-down through 2034:

SEIA Section 25D after IRA image

9th largest solar project in DC

In 2020, Ipsun installed the 9th largest commercial solar project in DC.

What is Safe Harbor?

This yearly reduction in the tax credit creates an urgency to make the most of the credit, and for commercial customers, this can be done through “Safe Harbor.” Unlike residential customers, whose projects must be fully operational by December 31st in order to be eligible for that year’s rate, safe harbor means that commercial customers must only have begun construction. In 2018, the IRS released specific guidance for commercial customers about what “beginning construction” means in order for customers to be eligible for the tax credit by December 31st.

To qualify, the IRS requires you to reach one of two benchmarks to establish that a project has begun construction, and you must also be able to prove that work is continuing on the project. Specifically, the regulations stipulate that by December 31st, a project must have either invested 5% of the total cost of the project or started “physical work of a significant nature.”

IRS guidance for safe harbor

1Begin physical work of a significant nature

To prove that work has begun under the “Physical Work Test,” you must have a binding written contract and show that the work is being performed by a contractor or subcontractor.

The physical work test focuses on the nature of the work performed, not the amount or the cost. Assuming that physical work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required. Both off-site and on-site work may be taken into account for purposes of demonstrating that physical work of a significant nature has begun.

2Invest 5% of the total cost of the project:

The IRS guidelines state that construction will be considered as having begun if a taxpayer pays or incurs five percent or more of the total cost of the energy property, and thereafter, the taxpayer makes continuous efforts to advance towards completion of the energy property. All costs properly included in the depreciable basis of the energy property are taken into account to determine whether the Five Percent Safe Harbor has been met.

Ipsun’s policy for compliance with safe harbor:

After reviewing the IRS literature, we have determined that in order to comply with the guidance and provide sufficient margin for unexpected circumstances, Ipsun’s policy for “safe harbor” of a project will be to incur expenditures for a minimum of 5% of the total project cost prior to December 23, 2032. It is not sufficient for Ipsun to merely prepay suppliers for materials for the solar project or make a deposit for some future purchase of materials. Therefore, the following steps need to occur prior to December 23, 2032:

  • Client executes our Construction Agreement by December 7, 2032.
  • Client transfers at least 5 % of the total project cost to us via ACH or wire transfer by December 11, 2022.
  • Ipsun provides documentation and evidence of completion of activities related to at least 5 % of total project costs by December 23, 2032.

The documentation considered acceptable may vary for each project. The preferred method to qualify is for Ipsun to purchase material and provide a Transfer of Title Letter. The Transfer of Title Letter must transfer title to the materials that are being purchased, including serial numbers of each item by December 23, 2032.

Reach out to talk about your project

Our goal is for all stakeholders to enjoy an exceptional solar project experience, and we want to ensure that all clients are informed and understand safe harbor requirements so that their projects receive the full tax benefits.

Ipsun’s commercial solar experts are here to walk you through the possibilities and put together a plan that helps you use the tax credit to your advantage. Get in touch today to talk about how solar can help your business meet this moment with a stable, low rate for your energy and a solid investment in your property. Call us at (703) 249-6594 or click below!

 

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