The Internal Revenue Service (IRS) issued guidance on June 23, 2018 establishing that solar developers who invest at least 5% of the total expected installation cost of a project by the end of 2019 will qualify for a 30% investment tax credit (ITC).
The previous law that originally created the credit did not specifically define what qualifies as beginning construction on a solar energy project which made it difficult to calculate the value and timing of the credit when planning a solar project. The new guidance specifies that developers have four years to begin a project to qualify for the ITC, which then begins to wind down from 30% to 10% based on the construction and service dates of the project.
Developers breaking ground or making the 5% investment in the installation by 2020 will have until 2023 to begin to produce electricity in order to qualify for the highest Investment Tax Credit of 30%.
The clarification from the IRS breaks down as follows:
Additionally, these projects work very well with funding through the U.S. Department of Energy Property Assessed Clean Energy (“PACE”) program.
PACE financing is a fairly new and flexible mechanism for adding equity to old projects, providing necessary capital inputs into new projects and extending commercial financing over a longer period than is available with most traditional commercial real estate financing products. Minnesota passed PACE-enabling legislation in 2010, allowing multiple PACE programs to begin operating in the state. PACE financing terms can last over 20 years and financing is based on real property tax special assessments without the need for a mortgage or more traditional security which is evaluated as debt against a project. In some circumstances, PACE can actually add to the equity available for a project and provides a unique financing mechanism for redevelopment or green-greenfield projects.