Lack of IRS Solar Tax Credit Guidance Clouds New Projects

Source: By Kat Lucero, Bloomberg BNA • Posted: Friday, September 29, 2017

Solar energy developers hoping to break ground on large-scale projects want the IRS to define new-construction requirements for a renewable energy tax incentive.

At issue are the solar investment tax credit’s “beginning of construction” requirements enacted in 2015 as part of a multiyear phasedown of the incentive. New multimillion-dollar projects are on hold because developers remain uncertain how to calculate the credit into their capital planning, lobbyists and practitioners told Bloomberg BNA.

The solar ITC, under tax code Section 48, is currently 30 percent of the basis of eligible property placed in service during the taxable year, but it will phase down to 10 percent for commercial projects. The 2015 law added a start-of-construction factor to eligibility criteria, allowing projects that begin building during the phasedown period to get the credit applicable to the year they begin, if they are placed in service before 2024.

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It’s important that “our companies have those rules of the road now so they know when they can start a project” and “know exactly what the IRS is going to say,” said Christopher Mansour, vice president of federal affairs at the Solar Energy Industries Association.

Practitioners want the Internal Revenue Service to provide, for example, the minimum percentage for the beginning-of-construction’s safe harbor, as well as for specific construction equipment and materials purchased to meet that test.

The solar industry is expecting more instructions because the IRS has already provided beginning-of-construction guidance for the wind production tax credit—another renewable energy incentive phased down under the Consolidated Appropriations Act, 2016, enacted in December 2015.

Abigail Ross Hopper, SEIA’s president and CEO, said the IRS has submitted draft guidance to the Treasury Department for review. In an Aug. 23 letter, she urged David Kautter, the new assistant secretary for tax policy, to prioritize the guidance “as quickly as possible.”

Treasury and the IRS declined to comment on the status of the guidance.

The ITC has been critical to the growth of the U.S. solar industry. More than $66 billion has been invested in installations nationwide and more than 170,000 jobs have been created since the incentive was created in 2006, the SEIA said.

The group estimates that by 2020 the solar industry will install more than 20 gigawatts of solar electric capacity annually and employ more than 420,000 workers. The additional solar energy will more than offset carbon emissions from the lift of the oil export ban on an annual basis by 2019, the SEIA said.

‘It Gets Complicated’

The 2015 law made significant changes to the solar ITC by keeping the current 30 percent rate for commercial and residential projects until the end of 2019. The credit will phase down to 26 percent in 2020 and 22 percent in 2021, and then drop to a permanent 10 percent for commercial projects and 0 percent for residential projects.

“It gets complicated to sort all this out when you’ve got multiple projects happening with different vintage credit years and different begin-construction years,” said Lee J. Peterson, a tax attorney in CohnReznick LLP’s renewable energy practice in Atlanta.

Investors and lenders want to be certain of a project’s finances before they back a deal. “The financial backers are very nervous. They don’t want any mistakes. They don’t want any uncertainty about which ITC rate you can get—are you going to get the 30 percent or 26 percent?” Mansour said.

Parallels to Wind?

Part of the uncertainty is whether the solar ITC guidance will mirror that for the wind industry’s PTC. The agency issued its latest guidance ( Notice 2017-4) for wind projects in January.

“I think everybody is speculating the same rules that apply to wind and other technologies now will also be used by the IRS to apply to solar,” said Gregory F. Jenner, a partner at Stoel Rives LLP in Washington who focuses on planning for renewable energy projects.

“But again we are guessing. We don’t know for sure,” said Jenner, a former Treasury acting assistant secretary for tax policy and a deputy assistant secretary for tax policy.

To meet the PTC’s requirements, for example, a wind project has four years from the construction start date to begin service. But the IRS might not grant solar developments the same timeline, because commercial solar and wind structures are different in scale.

Peterson suggested the IRS could begin the process of clarifying the solar ITC guidance the same way it did for the wind PTC—the agency released several notices that clarified instructions before issuing the January notice.

“We need some of that detail to start the process of understanding how the IRS interprets the rules, and we’ll start with that,” Peterson said. “If it turns out we need more clarification, we’ll come back and ask more questions.”