North Carolina clarified in late September how to prove solar projects are far enough along by year end to qualify for a 35% state tax credit.
A project must ordinarily be in service by December 2015 to qualify. However, the state legislature granted an extra year to complete any solar project on which the developer has “incurred” at least a minimum percentage of project costs and completed a minimum percentage of “physical work” by December. The percentage is 50% for projects with a DC capacity of 65 megawatts or more. It is 80% for smaller projects.
Developers had to notify the state tax department by October 1, 2015 of any potentially eligible 2016 projects by letting the department know each location, total cost estimate and project size.
Proof of the incurred costs and percentage completion must be submitted by March 1, 2016. The developer must certify in writing as to the costs and physical work completed, and it must submit notarized reports from a certified public accountant attesting to the costs and from an independent engineer about the percentage of physical work completed. Both the engineer and accountant must be licensed in North Carolina. The state may release forms in January to use for making these certifications.
The state released a series of frequently-asked questions and answers in late September.
Costs are not considered “incurred” for federal income tax purposes until delivery of equipment or services; it is not enough for the developer merely to have paid money.
The latest state guidance is ambiguous about what is required in North Carolina. However, an official with the state tax department confirmed by email that “economic performance” is not required and that accrual of costs is enough. Costs are considered accrued when the developer is legally obligated to pay and the amount is known. There is no deadline actually to have made the payment, although a long delay may call into question whether there was really a legal obligation to pay.
The state issued a table to guide engineers on how to measure the percentage of completion. According to the table, a solar project is considered 5% complete at the end of design, engineering and site preparation, another 20% complete after all the posts have been installed, another 15% complete when all the racks have been mounted on posts, and another 20% complete when all the panels have been mounted.
If only part of a task has been completed, then the engineer should weight that percentage. For example, if only half the solar panels have been mounted, then only 10% completion — half of 20% — would be credited to toward that work stage.
The state said the “project” that must be at least 50% or 80% complete by year end is one or more solar installations on a contiguous land tract.
A developer can divide a large project into smaller projects so that a smaller project qualifies even though the larger project does not.
The company that notified the state tax department by October 1, 2015 that it has a 2016 project does not have to be the company that ends up claiming the tax credit. Ownership of the project can change hands.
If the final project ends up costing more than was expected at the end of 2015, so that the costs incurred through 2015 end up less than the 50% or 80% required, it does not matter. Eligibility for the 2016 deadline to complete the project is determined at year end 2015 based on the projected project cost at that time.
Developers are asking what happens if the local power company cannot connect the project to the grid by the completion deadline. The tax department said the developer is out of luck: the project is not considered in service.