Peace of mind for commercial solar projects: How to safeguard the Federal ITC

Commercial and industrial solar projects have extensive construction timelines that sometimes span months or years. What happens if policies like the federal investment tax credit (ITC) change during that period?

The simplest way to secure your tax credit is to ensure your solar system is in service the same year the project started, but that is not always the case.

Thankfully, the IRS established safe harbor provisions to secure the tax credit.

In 2022, the Inflation Reduction Act (IRA) established the ITC at 30% and extended it through 2032.

What is Safe Harbor?

Safe harbor is a provision established by the IRS that allows project owners to preserve the tax credit of a given year by meeting the requirements for “beginning construction.”

This allows project owners to secure the 30% ITC and any qualified tax adders, like the Energy Community Bonus.

Defining the "beginning of construction"

Two different strategies will fulfill the “beginning of construction” requirements. The first is to begin physical work of a significant nature, and the second is to incur at least 5% of the total project cost.

• Physical Work Test‍
  • The physical work test focuses on the nature of the work performed and not on a required amount or percentage threshold.
  • Both on-site work, like the installation of racks or modules, and off-site construction activities, including manufacturing custom parts, can be considered acceptable.
  • The contractor must be under a binding agreement before construction if the project owner does not perform the work.
• 5% Cost Incurred Test‍
  • The cost incurred test requires the project owner to pay at least 5% or more of the total cost of the solar project.
  • This safe harbor method is the simplest of the two, as purchasing modules, inverters, or solar panels quickly clears the 5% threshold.
  • Green Convergence recommends purchasing the solar panels, allowing project owners to lock in panel prices and satisfy the 5% cost incurred test.

What to do next

The best safe harbor strategy ultimately depends on the unique properties of your solar projects, and picking the right solar partner, like Green Convergence, can design the right system for your business.

Given our proven development history of multiple commercial projects, we will handle various processes on your behalf, including the application, the interconnection agreement, the site development plan, and installation.

Contact one of our financial experts at commercial@greenconvergence.com to evaluate your options to determine the best strategy to secure the maximum tax credit possible for your solar investment.