A question for the tax-credit experts

[jonnyboy7]

My solar was due to be installed last month, but PG&E and permitting issues have slowed things due to the needed electrical upgrade. At this point, it looks like the install will not be completed and the system “turned on” until January. My contractor claims that since the project has begun (permit approvals), I can claim the credit on my 2021 tax return. I’m skeptical. What needs to happen for me to claim the credit on my 2021 taxes? Does the project just need to be started? Completed? Something else? Thanks in advance. (And yes, I’ll check with a tax advisor as well, but appreciate this group’s expertise).

[solarix]

IRS rules changed two years ago when the ITC was extended to allow taking the tax credit in the year construction of the project is started. Of course, you have to spend the money this year as well.

[heimdm]

My understanding is that provisioning which are you speaking about is the "safe harbor provision." However, there are 2 section of the IRS code, one for residential and one for commerical and utilities. When I looked into it, "safe harbor" is only found in the commerical/utility part of the IRS code. For residental the standard is when the system is placed into service, if doing grid-tie this is usually when you are given final authority to operate.

[azdave]

From energy.gov

Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics

https://www.energy.gov/sites/default/files/2021/02/f82/Guide%20to%20Federal%20Tax%20Credit%20for%20Residential%20Solar%20PV%20-%202021.pdf

The system must be placed in service during the tax year and generate electricity for a home located in the United States. There is no bright-line test from the IRS on what constitutes “placed in service,” but the IRS has equated it with completed installation.

[jonnyboy7]

My contractor / solar consultant continues to insist that the IRS only requires that the project be started or a 5% payment be made, and cites IRS Notice 2018-59:

https://www.irs.gov/pub/irs-drop/n-18-59.pdf

This is consistent with what Solarix posted above, but contrary to what the other posters say and what is on the energy.gov website (which does seem inconsistent with the IRS publication). Is there a definitive answer to this critical question? I can’t be the only person whose project has started in year 1 and concludes in year 2. Thanks in advance!

[azdave]

My contractor / solar consultant continues to insist that the IRS only requires that the project be started or a 5% payment be made, and cites IRS Notice 2018-59:

https://www.irs.gov/pub/irs-drop/n-18-59.pdf

This is consistent with what Solarix posted above, but contrary to what the other posters say and what is on the energy.gov website (which does seem inconsistent with the IRS publication). Is there a definitive answer to this critical question? I can’t be the only person whose project has started in year 1 and concludes in year 2. Thanks in advance!

You can claim whatever you want on your tax returns and then see what happens if you get audited. Other people may have successfully claimed the credit incorrectly but didn't get audited so they assume it must have been okay. That is not clear proof that it is allowable. I'll bet plenty of people working at the IRS don't even know the answer.

You will never get in trouble if you claim the credit in the year the project is fully completed and goes online but you might get in trouble if you claim it before the project is completed. Seems like an easy choice to me but you really should consult a tax professional.

[heimdm]

Article 48 applied to Commerical and Utility solar projects.
Article 25D applies to residential solar projects.

[chrisski]

My contractor / solar consultant continues to insist that the IRS only requires that the project be started or a 5% payment be made, and cites IRS Notice 2018-59:

https://www.irs.gov/pub/irs-drop/n-18-59.pdf

This is consistent with what Solarix posted above, but contrary to what the other posters say and what is on the energy.gov website (which does seem inconsistent with the IRS publication). Is there a definitive answer to this critical question? I can’t be the only person whose project has started in year 1 and concludes in year 2. Thanks in advance!

Asking as a guy who may go to a tax consultant for a first time.

Will the guy who is filling out your taxes take responsibility for any fines the IRS gives you for his bad tax preparation if he is wrong?

[J.P.M.]

Will the guy who is filling out your taxes take responsibility for any fines the IRS gives you for his bad tax preparation if he is wrong?

I'm not a tax expert but seems to me that most do, some don't. Either or any way, most seem to know little about U.S. IRS tax procedures/code with respect to alternate energy improvements.

Best to ask and get specifics before you do business w/a tax preparer.

[heimdm]

A good tax preparer will be able to figure it out. One of the biggest reason to pay a good tax preparer is so if the IRS comes a calling for an audit, they can handle it.

[branske]

For what it’s worth, I am tax specialist and can try and answer the relevant question.

The term “placed in service” means the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity.

Hope that helps. There are examples in regulations, not directly on point in section 25D, the code section that grants the credit. If there is an interest I can provide those in a subsequent post or provide a link.

The bottom line is that the credit is not allowable until the equipment is installed and operable. Prior to that the IRS is likely to deny the credit if the taxpayer’ return is selected for audit.

[scrambler]

It is all about Plausible Deniability

[heimdm]

I would say if a specific expense is permitted during an audit, that's a little more subjective and limited by your tax attorney's skill. When it comes to "in-service", definition I don't think there is much wiggle room there, as that is probably going to file in the eyes of the IRS more along the lines of fraud. Allowing or denying a specific expense at the 26% rate even if you lose the expense in an audit, probably isn't going to be that much actual $$. If you lose the entire credit, you can bet the IRS is going to make you pay all of it back, even if you are eligible to claim it the following year. Personally, betting the entire credit is more risk than I would be comfortable with.

[branske]

Technically, if one claimed the credit one year earlier than allowed the IRS would move the credit to the subsequent year. It would be difficult for the government to sustain a complete disallowance of the entire credit.