Safe Harbor Solar Projects in 2024
As 2024 winds down and 2025 brings the uncertainty of new government leadership, and especially new promises of tariffs on imported goods, we’re answering your questions about safe harboring solar modules and other equipment. We anticipate another round of safe harboring this year, following the observed success of developers and IPPs in safe harboring solar modules and other equipment to qualify for maximum Investment Tax Credit (ITC) benefits in the past.
What does “safe harbor” mean in the solar industry?
Safe harboring is a provision in the ITC that allows developers to effectively freeze the tax credit rate and requirements in a given year for a specific solar project, assuming that project qualifies.
The ITC, which is laid out in Section 48 of the Internal Revenue Code (IRC § 48)1, includes a Safe Harbor provision that allows solar developers to preserve the tax credit for a given year by beginning construction on a solar project before the year ends. Establishing that a project has “commenced construction,” as the provision reads, is crucial for projects that may not be completed by year end to still benefit from the current ITC rates and requirements.
There are two primary ways to satisfy the “commenced construction” requirement:
(1) 5% test
This benchmark is met once the taxpayer pays or incurs 5% or more of the total cost of the solar energy property. This will typically be the most practical way for solar developers to safe harbor projects before the end of 2024. Purchasing inverters and modules is the most straightforward way to meet the 5% benchmark. It’s less complex than trying to reach 5% through costs related to permitting and design.
If you decide to go the equipment route, keep in mind this test requires the equipment to be fully purchased by Dec. 31, 2024 to qualify under the 2024 rules. Translation: don’t wait until the last minute to make those final year-end safe harbor purchases.
(2) 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. Projects that have not already commenced construction are unlikely to qualify under the physical work test this late in the year.
Specific requirements and deadlines for safe harboring can vary depending on the project’s location and specific circumstances. Consult a tax or legal expert familiar with solar PV projects and the ITC to maximize tax benefits and ensure your project’s compliance.
Safe harbor does NOT apply to homeowner-owned residential PV systems.
Tax credits for homeowner-owned residential PV systems are governed by an entirely different section in the tax code than commercial or large-scale solar projects.
Section 25D of the Internal Revenue Code (IRC § 25D)2 governs tax credits for small-scale residential solar energy generation projects and is distinct from Section 48. Both include investment tax credits, but the rules for eligibility and tax credit calculations are different. Unlike Section 48, Section 25D does not include a safe harbor provision.
What considerations are there for safe harboring solar projects in 2024?
More demanding requirements are set to take effect in 2025, making safe harboring in 2024 a potentially wise choice.
The IRA introduced a new ITC provision, Section 48E, that will replace Section 48 on Jan. 1, 2025.3
While the differences between the two in practical terms are minimal, many solar projects may not qualify for the more demanding requirements that were introduced with the IRA and coincide with the rollout of Section 48E. The domestic content requirement, for example, rises to 45% for projects starting in 2025, 50% in 2026, and maxes out at 55% for projects starting construction in 2027 or later, assuming no changes from lawmakers.
The prevailing wage and apprenticeship (PWA) requirements introduced with the IRA carry over from Section 48 to 48E. Projects over 1MW must meet the PWA requirements to qualify for the full tax credit.
Based on the specifics of their projects, developers may elect to safe harbor this year rather than risk leaving tax credits on the table next year.
As with all things tax related, guidance will vary based on project specifics and taxpayer circumstances. Work with your tax or legal advisors to determine which projects might be good candidates for safe harboring in 2024.
Both Sections 48 and 48E establish a base rate / bonus rate structure for determining investment tax credit eligibility. Solar projects automatically include a base rate of 6% and may be eligible for additional bonus credits (or “adders”) if they meet specific requirements, up to 30%. Once the percentage is determined, it is applied to the cost basis of the qualified energy property.
Safe harboring may be a way to hedge against political uncertainty.
While we would prefer not to speculate on what exactly a second Trump Presidency will mean for the solar industry, it’s safe to expect broad tariffs, reduced spending overall on renewable energy sources, and some revisions to the IRA (inclusive of the ITC). Safe harboring in 2024 may be a smart way to get ahead of those changes.
Is it possible to qualify for the domestic content bonus tax credit this year?
That depends. Are you interested in thin film?
Using First Solar’s thin film is the surest way to qualify for the 10% domestic content bonus this year. As an authorized First Solar dealer, we’re uniquely qualified to help you incorporate thin film into your design, purchase the right equipment, and store it until you need it. We’ve been a First Solar preferred partner since it entered the DG space in 2020 and have sold more thin film than any other distributor.
We’re huge fans of thin film (because of its advantages over conventional silicon modules), but we know thin film isn’t suitable for all applications. If thin film isn’t right for your project, you may find it challenging to find US-made modules that satisfy the domestic content requirements. That will change in coming years as more US module and component manufacturers come online.
Reach out to us if you’re interested in exploring thin film as part of your safe harbor strategy.
New elective safe harbor tables introduced by the IRS make it easier to calculate domestic content percentages on a fixed-cost basis.
The IRS released guidelines earlier this year for a new elective safe harbor (Notice 2024-41).4 This method of calculating the domestic content percentage assigns fixed cost percentages for project components. Using the elective safe harbor, solar developers can identify ways to meet the domestic content requirement without knowing the actual cost of all project components.
For example, using the safe harbor calculations, a PV solar project could reach 30% domestic content by using US-made solar cells. For energy storage, using battery packs with US-made solar cells and packaging could get the project to 48% domestic content.
"[Notice 2024-41] grants a promising reprieve to the Prior Notice’s relatively inflexible (and arguably impracticable) standard on seeking direct cost information from manufacturers, raising novel structuring considerations for energy producers, developers, investors and buyers."
As US-based solar manufacturing continues to ramp up, most projects that qualify for the domestic content bonus will likely do so by sourcing a mix of US-manufactured and imported components.
We can help with that as well. Kinect Solar offers a “kit” for ground-mount PV projects that makes it simple to hit the domestic content requirements in the most cost-effective way, using a combination of foreign and domestic components.
Learn more about our domestic solar kits.
DOMESTIK Solar Kits, by Kinect Solar, are the smarter, simpler way for developers to purchase domestic equipment and qualify for the domestic content bonus. Download the brochure to learn more.
What are the next steps if I want to explore my safe harbor options with Kinect Solar?
We are happy to help! Follow this checklist to ensure you meet the necessary payment deadlines:
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Determine which projects are your best candidates for safe harboring. Jot down the size and requirements for each project.
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Contact your Kinect Solar account manager to get started on a detailed safe harbor plan. Together you'll discuss your equipment options, order timelines, and storage needs.
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Review your safe harbor plan with your attorney or accountant to verify safe harbor eligibility, applicable tax credits, and tariff risks.
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Place your equipment order. Ensure your purchase orders are signed no later than Dec. 13. If you need storage, make sure you have an applicable warehouse agreement in place.
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Submit payment no later than Dec. 27 to account for potential processing issues and ensure confirmed receipt of funds prior to asset transfer (or warehouse agreement start). In the table below are typical processing times by payment method. Please plan accordingly to meet the payment deadline:
Payment Method Processing Time Transaction Limit Credit card Within 24 hours $999,999.99 USD ACH direct debit 3-5 business days $999,999.99 USD ACH transfer Within 24 hours None Wire transfer Within 24 hours None Physical check 7-10 business days None Please note, there are many factors outside of our control that may influence processing times. -
Confirm your order(s) are paid in full no later than Dec. 31.
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As Kinect Solar’s content manager, Kate Wilcox is focused on keeping our partners and clients in the solar industry up to speed on policy and supply chain developments. She has been writing in the solar industry since 2017 and believes in a future powered by renewable energy. Kate loves living and hiking in the Rocky Mountains.
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