Is Placing an Order for Solar Panels Considered “Construction”?

Dear Solar Contractor,

Thank you for your inquiry and glad you’ve found the articles helpful.  You are not alone on the question of “safe harbor” qualifications for 1603.  In fact, the IRS recently released a FAQs providing further information (here).

While we would have to understand your individual scenario more deeply before giving you an official legal opinion, we can say generally that you are probably correct in assuming that you must demonstrate to the Department of Treasury that you began construction of the project in 2010, even for a solar system that will not be “placed in service” until 2011.  The construction  requirement can generally be proved through either (1) actual physical activity, or (2) the expenditure of money (5% safe harbor requirement).

In your case, ordering the solar panels from your manufacturer in 2010 will likely fulfill the latter (safe harbor) requirement, so long as certain other conditions are met.  This is true even if you have not yet begun construction on site, so long as you will have at least “paid or incurred” more than 5% of the total actual cost of the property before the December 31, 2010.  Under this option, it seems that you need not even begin physical work (e.g., on-site construction) to qualify for the program.

The term “paid or incurred” has specific meaning for tax purposes, based on whether you are an accrual method or tax method taxpayer (there are specific wrinkles for both, which are beyond the scope of this answer).  But generally, costs must be paid or incurred pursuant to a binding written contract.

Also, keep in mind that even if 5% of your reasonably projected total costs are paid or incurred before the end of 2010, this will probably not have any consequence if the total costs of the project turns out to be higher than anticipated.  In other words, the safe harbor is applied to the total actual project costs, not the budgeted or projected costs of the project.  Therefore, a wise solar contractor would probably be better off to build in a cushion for the cost overruns when complying with the safe harbor guidelines.

As to your last question, it will likely depend on your specific project requirements.  Generally, expenditures for property that qualify for a grant qualify under the 5% safe harbor as well.

We would be happy to discuss how we can assist you further on some of the finer points related to your application.  Please feel free to contact Cleantech Law Partners anytime via email: questions@cleantechlawpartners.com.  Good luck with your application!