Investment Tax Credit Five Percent Safe Harbor

[pat]

I have a client who wants to make the payment required for the Five Percent Safe Harbor election in 2020 to meet the requirement for the 26% Investment Tax Credit for a Solar Energy project on his farm. The project will be finished and put in service in 2021. I cannot figure out how to make the Five Percent Safe Harbor election on the 2020 return or if this is the appropriate tax year to make the safe harbor election. More importantly, neither the guidance in the Instructions for Form 3468 nor IRS Notice 2018-59, are clear as to when the actual credit is claimed in conjunction with the safe harbor election. Is the safe harbor election made in 2020 when the payment is made and that just reserves the 26% amount of the credit to be claimed when the property is actually placed in service on the 2021 return? Or is the credit claimed in 2020 when the safe harbor election is made subject to successful completion of the project in 2021 (and the continuous effort requirements of the safe harbor election specified in Notice 2018-59.) Sorry to be so daft but the guidance does not make these critical points or the procedures clear. If this is not done properly, the amount of the credit drops to 22% in 2021 and the full credit could be at risk.

All knowledgeable assistance is appreciated. Thank you!

[JRC]

Any information update to this available?

[itonewbie]

@JRC Perhaps you'd like to elaborate what update you're looking for?  The ship has sailed and things have since changed.

[JRC]

I have a client who signed a contract back in 2021 with a small deposit for Solar Panels but wasn't completed and paid for until 2023. And wants to claim the credit for 2022. I am looking at the Safe Harbor 5% test to claim the credit in 2022 and whether more clear information is available to how this is done.  Basis of Assets, Depreciation Beginning Date for 2023 or 2022. Does the Date Construction begins only have to do with what Year the Credit is claimed and the ITC credit amount? Or do I wait until 2023 to claim the credit on their 2023 return.

[qbteachmt]

Did you read the IRS resources, such as:

https://www.irs.gov/newsroom/treasury-irs-extend-safe-harbor-for-renewable-energy-projects

"with a small deposit"

A deposit doesn't qualify. They need to have paid for parts and/or equipment, that meets the 5% limit or have begun significant construction activities. I found you this article:

https://milehighcre.com/how-to-safe-harbor-the-26-solar-tax-credit-before-it-drops/

And are you aware that both covid and IRA affect this?

https://blog.namastesolar.com/safe-harbor-strategies

https://kinectsolar.com/ira-safe-harbor/

[JRC]

Thanks for the information you provided qbteachmt. 

I also remember reading someplace that the 5% Safe Harbor amount could be met if the contractor for the project expended 5% of the cost of the contract. Darn if I can find it now.

I am reasoning that if the Safe Harbor is met this 5% than the taxpayer would qualify for the 30% rate amount. If this is true I am further reasoning that the credit is claimed in 2023 when the project was completed and not in 2022 because it wasn't put into service until 2023. Correct?

[JRC]

One more thing. Is an Invoice for a Dollar amount representing the 5% from the contractor efficient to qualify for the Safe Harbor. The contractor sent an invoice in Dec of 2022 for a portion of the contract (not paid until 2023)

[qbteachmt]

"Darn if I can find it now."

Really? Did you read any of the links I provided?

Once again, first read if you even need to be bothered, because the rules changed, again:

https://kinectsolar.com/ira-safe-harbor/

Read for what they qualify for already, without any shenanigans. Otherwise, you seem to be describing downpayment and/or progress payment. However, articles refer to take title/ownership for products or components (not ordinarily in inventory, but specific and direct for that project) or have begun work of a significant nature (project owner has some risk in the project). That means specific benchmarks, not generic progress.

The contractor should be able to provide evidence that the contract meets grandfathered or safe harbor, as well. But that might not matter, since the 30% continues to be available, with qualifications.