The Internal Revenue Service released a new guidance Friday that establishes when the construction of a solar facility starts to qualify for the solar Investment Tax Credit.

The guidance, Notice 2018-59, provides two methods for determining the "commence-construction" date: 1) starting physical work of a significant nature or 2) meeting the "5 percent safe harbor test" by incurring 5 percent or more of the total cost of the facility in the year that construction begins.

*Residential, commercial and utility-scale solar projects may qualify for the full 30 percent Investment Tax Credit (ITC), as long as construction begins in 2019 and the project is placed into service before 2024. A prior ruling required completion in the same year. However, only third-party owned residential solar projects can benefit from the commence construction safe harbor provisions, customer-owned systems cannot.

The ITC steps down to 26 percent in 2020, then 22 percent in 2021. In 2022, the residential credit (Section 25D) will drop to zero, while the commercial and utility credit will drop to a permanent 10 percent.

Under the new rules, projects that start construction in 2019 will receive the 30 percent ITC for four years, 2020 construction start projects will receive the 26 percent ITC for three years, and 2021 construction start projects will receive the 21 percent ITC for two years.

The new IRS guidance on the ITC closely follows a separate guidance published for the wind industry’s Production Tax Credit (PTC). According to the research firm Washington Analysis, the IRS guidance includes "few surprises or anything that would suggest an effort to limit the credit’s benefit for the industry."

Washington Analysis researchers anticipate clarifying the tax law will produce an upside for solar companies, including First Solar, SunPower, Canadian Solar, Sunrun, Tesla and Vivint Solar.

Analysts at Credit Suisse said the IRS announcement is better than expected as it safe harbors all solar projects for four years, through 2023, versus expectations of a fixed two-year safe harboring. 

"The news is positive for utility scale solar developers who can now avoid solar tariffs imposed on imports through 2021, procure majority of their solar panels in later years, and still qualify for the higher tax credits," analysts wrote in a note to investors. "The magnitude of solar demand pushouts would depend on contractual obligations for energy deliveries." 

To the extent that developers delay to avoid paying tariffs, solar manufacturers will suffer. According to Credit Suisse, manufacturers are already suffering from a supply glut and lower demand in 2018 and 2019.

Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association (SEIA), praised the IRS notice.

“The IRS has taken an important step forward with this guidance and provided certainty that will help solar project sponsors finance and build more solar," said Hopper, in a statement. "Our members have been working hard to secure financing for projects and keep them on track to meet critical development and construction milestones. This guidance provides them with a strong timeline for keeping up momentum for new projects.

“In the absence of this commence construction guidance, tax equity partners were growing cautious about project risk," she added. "We look forward to working with the IRS to ensure the guidance is implemented in a way that keeps this solar economic engine moving forward.

Congress voted to extend the ITC and PTC in 2015, in a major victory for the renewable energy sector. With the sunset date on the horizon, renewable energy investors have launched a campaign to push policymakers to implement a long-term policy driver for clean energy resources.

“We’re looking at a world where in the early 2020s, business-as-usual projections have the renewable sector’s growth rate dipping dramatically,” said Gregory Wetstone, president and CEO of American Council on Renewable Energy, recently told GTM. “At that point, we’re in a world where there are no federal tax incentives of any kind, and virtually every other sector has incentives baked into the code."

This story was updated to include additional insights from Credit Suisse.

*This story was updated to clarify that customer-owned residential solar projects cannot benefit from commence construction safe harbor provisions.