IRS Notice 2018-59 was generally welcomed news to the solar industry as it provided the industry specific guidance as to how to start construction to ensure that a project would qualify for a 30 percent investment tax credit (ITC), rather than a phased down amount. The ITC statute requires a project to start construction before the end of 2019 in order to qualify for the 30 percent ITC.
On June 22, 2018, the IRS published an advance version of Notice 2018-59, on its website. That guidance still appears on its website. However, when the IRS published the official version of the notice in the Internal Revenue Bulletin of July 9, 2018 there were some variations from the advance version available on the IRS website. The IRS did not highlight the fact it made changes, but the change in particular circumstances can matter to certain project owners. Here’s a “redline” that we have generated to show the differences.
The most material change is that under the “significant physical work” rules, which is one means to start construction, the original notice sanctioned contracting for the construction of a step up transformer, but the step transformer could not step electric generation up to more than 69 kilovolts. This limitation would have precluded many utility scale solar projects from qualifying under a transformer strategy as those projects would often require a transformer that stepped up the electrical generation to 138 kilovolts. Fortunately, the IRS realized that it had inappropriately constrained the strategy and removed the kilovolt limitation in the official version published in the Internal Revenue Bulletin but did so without noting the change. Understandably, some tax research services continue to improperly refer to the “69 kilovolts” limitation and need to be updated to reflect the version published in the Internal Revenue Bulletin. See, e.g., Fed. Tax Coordinator Analysis (RIA) ¶ L-16401.3F.
The IRS also corrected an example in which a project owner started significant work in 2018 and then in 2019 “incurred” the five percent of the total cost of the project for purposes of the “safe harbor.” In light of the fact that the cutoff date for a 30 percent ITC is December 31, 2019, the official version advanced each of these dates by a year: significant work in 2019 and the five percent safe harbor in 2020. The concept of this leapfrog example originated in Notice 2016-31 which applied to the wind industry and was based on a concern that project owners that were concerned they many not meet a four year safe harbor, provided in the wind guidance, would “re-start” in a subsequent year using a different strategy to re-start the four year clock. However, the IRS could have excluded this “combination of methods” prohibition from Notice 2018-59 completely as it will never apply absent a legislative extension of the ITC. This is because wind, unlike solar, is not subject to a legislative cliff. If a wind project complies with all of the rules properly and started construction in 2016, including an IRS requirement of continuous work from 2016 through completion, it could in theory be placed in service 2024 (or even a later year) and qualify for a full production tax credit (i.e., $25 a megawatt hour). (The likelihood of this actually happening is quite remote, particularly given the IRS guidance, but it is theoretically possible.) However, the solar ITC statute imposes a cliff which provides that regardless of when a solar project started construction, it only qualifies for more than ten percent ITC if it is in service by the end of 2023. Therefore, solar projects that start construction in 2019 (or any other year) must in all events be completed by the end of 2023 to qualify for more than a ten percent ITC. Thus, unless the deadline for more than a ten percent ITC is extended by Congress to after 2023, there was no technical need for the IRS to include the leapfrog example or even the four year safe harbor at all.
The IRS also slightly changed the numbering on certain paragraphs in the final version of Notice 2018-59, which can matter to tax advisors seeking to properly cross-reference a specific paragraph of the notice in drafting a contract or opinion.