The Inflation Reduction Act extended the Investment Tax Credit (ITC), which has been a major driver of solar growth in the United States, for another 10 years. It also introduced new requirements solar projects must meet in order to qualify for the full 30 percent credit. These new requirements go into effect at the end of January 2023. We’ll review the IRS guidelines to help you maximize your solar tax credits in the event you’re not prepared to meet the new requirements immediately.
IRA and ITC Overview
The IRA, signed into law in August 2022, contains a host of clean energy incentives to combat climate change. For a more detailed overview of the IRA, check out this post. Among the most relevant provisions for residential and commercial solar developers and installers is the ITC. This is a federal tax credit that has been in place since 2006 but had decreased from the original 30 percent and was set to expire. Now extended at its full rate through 2033, it offers up to 30 percent of the cost of clean energy installation in the form of an income tax credit, assuming taxpayers meet the new requirements.
Qualifying for the Full ITC
The extended ITC comes with some new provisions meant to encourage the creation of ethical, high-quality jobs. Projects beginning after January 29, 2023 must comply with the Prevailing Wage and Apprenticeship requirements, which include paying a prevailing wage and having a dedicated percentage of the workforce be in an apprenticeship program. Projects that do not comply with these requirements will be eligible for a 20 percent tax credit instead of the full 30 percent ITC.
Determining Prevailing Wage and Apprenticeship requirements for your projects:
- For prevailing wage information, refer to the US Secretary of labor at www.sam.gov. If you don’t find the specifics you need listed there, request a wage determination from the DOL at IRAprevailingwage@dol.gov.
2Include the type of construction, geographic area, and job description in your request. Unfortunately we don’t yet know how long these requests will take to process.
- Taxpayers and any contractors or subcontractors who employ four or more individuals to perform construction, alteration, or repair work must employ at least one qualified apprentice to perform such work.
- The percentage of required apprentice labor hours is 10 percent for projects beginning construction in 2022, 12.5 percent for projects beginning construction in 2023, and 15 percent thereafter.
Tips for meeting Prevailing Wage and Apprenticeship requirements:
- Keep detailed records of wages paid, including to contractors and subcontractors to establish the Prevailing Wage requirement was met.
- Apprenticeship agreements often provide a specific percentage of the journeyworker rate due for each level of apprenticeship. This can be applied to the prevailing wage rate listed to figure out the wage rate for apprentices while they are working on a project.
- If you are unable to retain qualified apprentices, you may qualify for an exemption if you establish a good-faith effort to meet the requirements. Registered apprenticeship programs can be found at www.apprenticeship.gov/partner-finder. Keep detailed records of your requests for apprentices from registered programs and the program’s denial or lack of response.
New IRS Guidelines and Grandfathered Projects
Projects with a maximum net output of less than one MW of electrical (AC) energy automatically qualify for the full 30 percent ITC.
8 Projects can also be grandfathered into the full 30 percent rate without meeting the new requirements if they can establish a project start date prior to January 29, 2023. You must meet one of these two tests to establish a project start date:
Physical Work Test
This test requires the initiation of “physical work of a significant nature” and a continuous commitment to it. Important to know: preliminary activities, like obtaining permits or securing funding, do not qualify as physically significant, nor does any work involving assets already held in inventory.
Physical work may include manufacturing custom-designed equipment for the project, but it does not include the manufacture of components that are in existing inventory or are normally held in inventory by a vendor. This test won’t benefit most solar projects, given that most assets are standardized and on-hand.
5 Percent Test (aka Safe Harbor)
To grandfather a solar project without performing extensive physical work (like excavation) that is common on wind projects but often unnecessary for solar implementation, use the 5 percent test. This benchmark is met once the taxpayer pays or incurs five percent or more of the total cost of the solar energy property.
This will typically be the most practical test for solar installers to “safe harbor” solar projects under the pre-January 29 requirements. Keep in mind that reaching 5 percent, while a small share of the project’s total cost, can be huge in absolute terms, in the tens of millions of dollars for large projects.
Tips for meeting Prevailing Wage and Apprenticeship requirements:
- Purchasing inverters and modules is usually the easiest way to meet the 5 percent benchmark. It’s less complex than trying to reach 5 percent through costs related to permitting and design.
- Be careful about older equipment that might help you meet the threshold but may become outdated by the time the project enters service.
- Make all of your contracts legally binding under state/federal law to establish specs for everything purchased and include conditions for dissolving agreements.
How Kinect Solar Can Help
Whatever deadline you’re trying to meet, we have solar services designed to help. Our solar experts can help with purchasing and procurement assistance at any level you desire.
1 Press Release (November 29, 2022). “Treasury Announces Guidance on Inflation Reduction Act’s Strong Labor Protections”. U.S. Department of the Treasury.
2,5,6 Retrieved December 13, 2022. “Prevailing Wage and the Inflation Reduction Act”. U.S. Department of Labor.
3 Retrieved December 13, 2022. “Inflation Reduction Act Apprenticeship Resources”. U.S. Department of Labor.
4,8 Scott W. Cockerham, Wolfram Pohl, Joshua Emmett (December 2, 2022). “IRA Update: What to Know About the New Guidance on Prevailing Wage and Apprenticeship Requirements”. Orrick Herrington & Sutcliffe LLP.
5 Retrieved November 30, 2022. “Treasury Announces Initial Guidance on the Inflation Reduction Act’s Labor Requirements for Renewable Energy Tax Credits and Incentives”. Greenberg Traurig, LLP.
This post is provided for general informational purposes only and does not constitute legal or financial advice. Kinect Solar makes no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of this information. Kinect Solar is not liable or responsible for any damages or losses resulting from or related to your use of this information. This post includes links to websites not affiliated or endorsed by Kinect Solar.