Minnesota Businesses Benefit from IRS 30% Tax Credit “Safe Harbor” for New Solar Energy Systems Committed To In 2019
It isn’t often that the IRS hands businesses in Minnesota – or anywhere else – a gift. But that just happened.
The 30% Investment Tax Credit (ITC) for installing a new solar energy system by a business or a commercial property owner was due to start tapering off to 26% in 2020, 22% in 2021, and so on. The IRS has effectively extended the ITC by creating a “safe harbor,” which maintains the 30% for four years where “continuous construction” of the system is occurring. The catch? Businesses must commit to a new solar array by December 31, 2019.
The IRS rules are mired in quite a bit of complexity. SO, we thought it would be helpful to provide an overview of how the new “safe harbor” works for Minnesota businesses and commercial property owners, and how this new opportunity works.
Tough but Fair Rules Govern Safe Harbor for Minnesota Companies
The IRS is giving you up to 48 months to bring the solar energy system online. That’s a lot of time.
The big proviso in the new rule is that a company must document that it has been working continuously on the project since committing to its start in 2019. But it must be completed within four years or the ITC will be retroactively denied, and the business may lose its entire ITC.
Washington D.C. tax lawyer Greg Jenner of law firm Stoel Rives told a recent industry conference that “If you put the facility in service before the end of the fourth year, then you have met the continuous rule. If you go beyond 2023 … you’ll have major problems proving to the IRS” that you met the rule’s requirement.
Here’s how a home owner, business or commercial property owner can qualify for the safe harbor ITC.
Two Options: Your Money or Our Sweat
There are two primary standards you will need to meet in order to qualify: Either “Substantially started work” or show a “continuity of effort.” The definitions are covered in Rule 2018-59, a mind-boggling, sleep-inducing document that your professional tax advisor should read if you don’t want to try fighting your way through it.
The first option, “started work,” requires that you begin the project in 2019, or at least sign a contract this year and purchase some or all of the components of the system before April 15, 2020. Starting work is relatively easy to prove. The workers arrived on a given date in 2019 and kept the construction going until the solar energy system was completed and activated as long as it happens before December 31, 2023.
The “Continuous effort” option is vaguer and requires full documentation and an ongoing commitment to the project.
Making a phone call and getting a quote will not likely, by itself, demonstrate continuous effort if you don’t have another meeting or sign a contract until 2022. However, an ongoing series of meetings with engineers and other people from a company such as Cedar Creek Energy as the system is planned, designed, modified, ordered and initiated may be sufficient to prove to the IRS – and a judge, if necessary – that the company was serious about the project on an ongoing basis.
The other demonstrable proof of continuous effort is to pay five percent of the total cost in 2019. But even this can be a bit confusing and a tax expert who specializes in the IRS’ safe harbor regulation can help clarify what represents a defensible contract cost.
Caveats, as Always
If you start the project in 2019, then the work must continue until it is completed. Having the installers halt work in 2020 while you look for a different financing solution than the one you started with means you won’t qualify for “substantially starting work.”
If there is any interruption for engineering, permitting or legal issues, experts advise against using the “work” method. On the other hand, tax expert Lee Peterson told the conference, “if you buy panels or other components in 2019 using the 5-percent rule, continuity is presumed.”
But you do have a grace period. If cashflow considerations, technology improvements or changes means that you can delay the actual purchase up up until April 15, 2020.
IRS, Not Treasury, Rules
What is different today compared with the last time a safe harbor was created?
The single biggest shortcoming with the 2012 safe harbor might have been that it was declared and managed by the U.S. Treasury Department, which had responsibility for approving applications. Many were rejected for what seemed to be arbitrary reasons, and the rules appeared to be applied on a discretionary basis: What was rejected from one company sometimes was approved for another. There was no recourse or appeal process.
As a result, many companies threw up their hands in frustration and walked away from installing a solar energy system at their facility.
That Won’t Happen in 2019
The new safe harbor rules were issued by the IRS, not Treasury. The tax code and countless tax court decisions require the agency to apply its rules uniformly and they are subject to due process. What this means is that any business meeting the requirements of the 2019 safe harbor will be approved. A business that feels a bureaucrat made a mistake may appeal the decision to the federal tax court in Washington.
Recently, Philippe Hartley, a solar finance expert from Clean Financing.com recorded a helpful video on the Safe Harbor Basics for 2019.
The safe harbor for your planned solar energy system ITC is complicated. At Cedar Creek Energy, we would be happy to answer your questions about your system and to provide the kind of detailed information about your system your tax advisor will want to see. Feel free to call us. While the benefit is enormous, the clock is ticking on being able to take advantage of it.
Like every business decision involving taxes, be sure to consult with an tax accountant or tax lawyer for advice and to understand how the IRS Safe Harbor might apply to your solar energy project.
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