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Power & Renewables Update: COVID-19 Issues Affecting Safe Harbored Solar Panels and Other Equipment

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Under IRS guidance, if 5% or more of the total cost of a solar project was “incurred” in 2019 the project remains eligible for a 30% federal tax credit. Otherwise, projects that begin construction in 2020 are eligible for only a 26% ITC (22% for 2021, and 10% after that). Generally, prepayments don’t count as costs “incurred” under these rules; however, a special rule treats prepayments as costs “incurred” if the taxpayer can reasonably expect the counterparty to deliver the purchased property within 3½ months after the date of payment (often referred to as the “105-day rule”).

In 2019, many solar developers (including many residential developers) purchased and prepaid for equipment to lock in the 30% ITC for the their projects (potentially through 2023). Under the IRS’s rules, a developer’s “expectation” of timely delivery is made as of the date of payment (i.e., in 2019).

A typical method of substantiating a developer’s “reasonable expectation” of timely delivery was for the developer to demand liquidated damages from the counterparty for late delivery.

However, if the developer borrowed to fund the prepayment or expected to finance the resulting projects with tax equity investors’ funds, the borrower or the tax equity investors may have also imposed contractual requirements (e.g., events of default or conditions precedent to funding) that effectively required timely delivery of prepaid equipment. Therefore, solutions to resolving a delayed delivery of prepaid equipment may be complex and involve multiple parties.

Potential solutions could include future guidance from the IRS (which is uncertain), all the relevant parties agreeing that the delay was not “reasonably expected” under current law (which may require fact-intensive legal analysis of the delay, including the date of the COVID-19 related-events that prompted the delay), or the parties’ amending their documents to transfer title or effect delivery in transit (which may not be commercially feasible). Solutions will vary, and there may be other solutions than those few described here, based on the facts and the terms of the parties’ agreements.

Several trade groups and industry players have advocated for administrative extensions from the U.S. Department of Treasury, and other extensions of tax credits and even cash grants. The situation, as most situations in this environment, is constantly evolving.

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