Solar developers need not worry that delivery delays caused by the coronavirus outbreak will disrupt investment tax credit (ITC) safe harboring. However, developers should take care to appropriately address any delays, as discussed below.
To qualify for a 30 percent solar ITC, taxpayers must show that they began construction of the solar energy project before 2020. Many solar developers rely on an Internal Revenue Service (IRS) safe harbor that treats construction as beginning when 5 percent of project costs are paid (for cash method taxpayers) or incurred (for accrual method taxpayers). Most developers are accrual method taxpayers and the simplest way to show they incurred a cost for solar energy property in 2019 was to take delivery or title to the solar equipment in 2019. However, developers who did not take delivery or title in 2019 may still have incurred a cost (and thus begun construction) in 2019, so long as they paid for the property in 2019 and, at the time of payment, reasonably expected to take delivery or title within 3½ months (or 105 days) of payment.
The outbreak of coronavirus has disrupted supply chains and slowed shipments worldwide, potentially delaying shipments of solar equipment beyond this 105-day window. Specifically, the spread of coronavirus and resulting quarantines have temporarily slowed or stopped raw material production, manufacturing and shipping throughout China. Consequently, Chinese manufacturers and shippers and other companies that rely on Chinese manufacturing or shipping, may delay delivery of solar energy property purchased in 2019. In general, however, these delivery delays should not affect whether construction of the property began in 2019 under IRS guidance because, as detailed further below, a delay related to the coronavirus should not impact whether a taxpayer, at the time of payment in 2019, reasonably expected timely delivery.
For taxpayers using the accrual method of accounting, a liability (such as a cost for solar equipment) is incurred when (i) all the events have occurred that establish the fact of the liability, (ii) the amount of the liability can be determined with reasonable accuracy and (iii) “economic performance” has occurred with respect to the liability. When property is provided to a taxpayer, as under a purchase agreement for solar equipment, “economic performance” occurs as the property is provided. For this purpose, property is “provided” to the taxpayer when the property is delivered or accepted, or when title to the property passes. However, a taxpayer may treat property as provided when the taxpayer pays the provider, so long as the taxpayer can reasonably expect the person to provide the property within 3½ months (or 105 calendar days) after the date of payment.
For example, if an accrual method solar developer ordered and paid for photovoltaic modules under a binding written contract with a Chinese manufacturer on December 31, 2019, the developer generally could treat the modules as provided on that date so long as the developer reasonably expected the manufacturer to deliver the modules by April 14, 2020. Thus, unless the coronavirus outbreak caused the developer’s otherwise reasonable expectation of delivery by April 14, 2020, to be unreasonable, a delivery delay due to coronavirus should not affect the date the developer incurred the cost for the modules (i.e., December 31, 2019). Accordingly, the developer could treat construction of the modules as beginning on December 31, 2019.
Barring clairvoyance, it would have been impossible to predict the new coronavirus’s effect on manufacturers’ ability to provide solar property under 2019 contracts. China first alerted the World Health Organization of several flu-like cases in Wuhan on December 31, 2019, but the virus was not identified as a new strain of coronavirus until January 7, 2020. On January 11, 2020, China reported just 41 people infected with 2019-nCoV and China did not suspend travel from Wuhan until January 23, 2020. Given the timeline of the coronavirus outbreak, virtually all of which has occurred in 2020, no purchaser of solar energy property under a 2019 contract could have predicted that 2019-nCoV illnesses and quarantines would delay provision of property manufactured in China or from Chinese components. Therefore, as long as a taxpayer otherwise reasonably expected the manufacturer or shipper to provide solar energy property within 105 calendar days of payment, delivery delays due to the coronavirus outbreak should not jeopardize the property’s qualification for a 30 percent ITC.
While these rules may comfort nervous taxpayers facing delivery delays, taxpayers who have received notices of delays should ask the manufacturer or shipper for as much information as possible regarding the delay. As a practical matter, if property is provided after 105 days from payment, potential tax equity investors and auditors will want assurance that the buyer reasonably expected delivery within 105 days of payment. To that end, taxpayers should request as much information as possible regarding the delay. A written record of the reason for the delay would help, along with any information about specific quarantines or illnesses that delayed manufacturing or shipping. For example, if the property has been constructed, but shipping is delayed because a port is quarantined, the taxpayer should be able to trace the planned shipment of the property and prove that the port was quarantined on the relevant dates.
Alternatively, developers who anticipate delivery delays should consider taking title and risk of loss to the solar equipment within the 105-day window. In that case, the developer should adequately document the transfer of title and risk of loss. To err on the side of caution, developers may wish to do both: take title and risk of loss to the equipment and compile a record of evidence about the delivery delay.