Is Placing an Order for Solar Panels Considered “Construction”?
I am finding your articles on some of the technicalities of the 1603 program for renewable energies very enlightening. I work for a solar energy company and still confused by one aspect of the application process, perhaps you could shed some light? My understanding is that to file for a property “placed in service after 12/31/2010” you must demonstrate construction began in 2010. I am currently working with a large client who is ready to sign a power purchase agreement, however we may not be able to begin doing on site-construction until early 2011. Construction will be completed in 2011. My question is if we order solar panels from our manufacturer in 2010 specifically for the project we are filing for, does that fulfill the “safe harbor” requirement of “beginning construction”? If so, would that cost need to be at least 5% of the total project cost to qualify? Are there any other off-site options that exist to demonstrate construction beginning in 2010? I appreciate the opportunity to be able to send you an email and am thankful for your time and answer.
Best regards, Solar Contractor
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: email@example.com. Good luck with your application!
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