Solar energy supply chains have been delayed due to the COVID health crisis — impacting everything from PV modules to inverters to brackets. This can put solar asset construction projects on hold. In response, the U.S. government moved to protect the solar industry from economic adversity by supporting the Taxpayer Certainty and Disaster Relief Tax Act of 2020 and publishing Notice 2021-41.
It’s hard to say how extensively the market has responded to this tax incentive to keep solar energy construction projects moving along while the climate change clock is ticking. The tax benefit amounts to 4% of the all-inclusive project cost. But the tax benefit is helpful. The relief takes two forms, according to documents from the Internal Revenue Service (IRS) and the Department of Energy (DOE):
- The Investment Tax Credit (ITC)
- An energy-property tax credit
These are two of three solar tax credits available to commercial, industrial and utility companies. The Act and the Notice made no changes to the third one, which is a credit for solar equipment manufacturing.
Businesses filing for the ITC use IRS Form 3468. It’s important to keep a comprehensive set of solar receipts for tax documentation. The information you maintain should ideally include PV module serial numbers.
Software to Help with Solar ITC Filings
To facilitate the solar ITC filing process, Raptor Maps’ new software platform, Raptor Solar, creates a trustworthy “paper trail” for documenting solar PV module installation. You can use our serial number scanning app to input PV module serial numbers into a digital twin — thus verifying when specific solar PV modules are installed. Scan serial numbers in less than two seconds per barcode with the Raptor App on a cell phone and/or a paired Bluetooth scanner. You can also then correlate serial numbers with lists from the OEMs to verify supply chains for safe harbor and facilitate warranty claims.
The Latest Investment Tax Credit for Solar Construction
The legislation continues an earlier trend in the U.S. solar industry. Decision makers have previously extended this credit to support renewable energy. The 2020 law offers a 4% increase in the tax deduction for several years, as shown in the right column in the table below. The Act and Notice decelerate the scale-down of the advanced energy credit. They also extend the safe harbor for some projects. The tax credits are defined as percentages of the qualifying amounts a company has spent that year.
Timeline for Phasing Down the Solar ITC
|Date Construction Began||Date Project Was Placed in Service||Continuity Safe Harbor||Tax Credit|
|1/1/2006 through 12/31/2019||Before 2026||No||30%|
|1/1/2019 through 12/31/2019||Before 2024||Yes (projects constructed between 2016 and 2019 now have their safe harbor extended to six years)||30%|
|1/1/2020 through 12/31/2022||Before 2026||No||26% (formerly 22%)|
|1/1/2020 through 12/31/2020||Before 2025||Yes (the safe harbor has been extended to five years)||26% (formerly 22%)|
|1/1/2023 through 12/31/2023||Before 2026||N/A||22%|
|1/1/2024 or thereafter||N/A||N/A||10%|
|Any date||After 12/31/2025||Either||10%|
(Sources: DOE and National Law Review)
Safe Harbor for Solar Energy Construction
The U.S. government uses continuity safe harboring to give companies more time to construct solar projects. A safe harbor allows a company to claim the tax credit for a solar project during the initial year when it has spent 5% of the construction costs or engaged in substantial physical site construction. The expenses and construction are required to be “integral” to the project. The DOE says there are some specifications covering how solar projects should take place:
- Vendors must deliver equipment and services within 3.5 months after paying for them.
- Construction of solar projects must continue with a consistent schedule. The schedule is considered consistent if it is completed within four years — or within ten years if the project is on federal land. Companies can provide more data to the IRS to show progress if the projects take longer.
Solar Expenses that Qualify for the ITC
An extensive set of equipment charges qualify as expenses for the solar ITC, according to the DOE. Installation fees and indirect costs, as well as sales and use taxes, also count. Some eligible expenses include:
- Solar PV equipment including panels, inverters and racking, as well as balance-of-system equipment.
- Circuit breakers, power transformers and surge arrestors for solar systems.
- Energy storage equipment that will be charged by renewable energy sources over 75% of the time.
Companies can also leave out a wide range of financial benefits from their calculations, including the ones below — some of which count as taxable income.
Items that Do Not Reduce the Basis Expenditure for ITCs
|Income Source||Exempt Types of Income|
Commercial solar projects can also often take advantage of accelerated depreciation, as the schedule below shows. The depreciation bonus has at times gone as high as 100%, but will drop off until it ends completely in 2027.
Depreciation Bonuses for the Solar ITC
|Date Project Was Placed in Service||Depreciation Tax Credit|
|1/1/2008 through 9/8/2010||50%|
|9/9/2010 through 12/31/2011
Or 1/1/2018 through 12/31/2022
|1/1/2023 through 12/31/2023||80%|
|1/1/2024 through 12/31/2024||60%|
|1/1/2025 through 12/31/2025||40%|
|1/1/2026 through 12/31/2026||20%|
|1/1/2027 and thereafter||0%|
Solar Investment Tax Credit Restrictions
There are some restrictions on the tax credit. It is only available to businesses and cooperatives that pay taxes in the United States or its territories. If a company sells its solar system before the sixth year it is in service, it has to pay some of the tax credits it received back to the federal government. There are also other unusual situations in which companies are required to repay the tax credits.
Extended Energy-Property Tax Credit
Businesses that use solar power or illumination can also claim a second credit for property where they produced the energy. The Act extended the deadlines for this credit. Properties with one or more of the three technologies below qualify for the credit:
- Fiber optic solar-illumination system that lights up the inside of a building
- Solar hot water system
- Solar electricity system
The property should be relatively new, meet quality standards and experience financial depreciation (or amortization), recent IRS instructions said. The credit does not apply to public utility property bought, built or reconstructed before February 14, 2008. Companies use the cost of property construction or reconstruction as the basis to calculate their tax credits. Depending on how the construction and/or purchase were financed, a company may need to reduce the basis by 50% and/or subtract rehabilitation expenses.
The instructions for IRS Form 3468 explain how to calculate this credit.
Software & Services to Help with Solar ITC Filings
Raptor Solar is an advanced software-as-a-service platform for the entire solar lifecycle — from financing and construction through operations. Powered by our industry-leading data model, Raptor Solar lets you optimize your PV assets, standardize data, analyze insights and collaborate. Strengthen asset efficiency, boost staff effectiveness and ultimately lift financial return. To learn more about Raptor Solar and how our serial number scanning app can help streamline ITCs, click here.
Disclaimer: Raptor Maps does not provide professional tax advice. We recommend that businesses consult the IRS and other experts when filing tax returns.
About Raptor Maps
Raptor Maps offers an advanced software platform to standardize data, analyze insights and collaborate across solar. Commissioning info, serial number mapping, equipment records, inspections, aerial thermography, warranty claims, mobile tools and more — all powered by our industry-leading data model. Intelligence for the entire solar industry — asset owners, managers, O&M, engineers, EPCs, financiers and OEMs. Standardize and compare data across installations, increase performance and reduce costs.