ITC and the Eligibility of Costs
One of the most common queries we receive related to solar projects and the Investment Tax Credit (ITC) regards the eligibility of costs associated with the project. While all projects are different, and facts and circumstances can dictate different outcomes, the general rules are pretty straightforward:
Any cost associated with the project that is not directly related to generating electricity would be considered ineligible. Sometimes this is easy to identify. For example, fencing around a ground mounted project is clearly not related to electricity generation. In other cases, it might not be as clear; such as a roof membrane that is painted white in order to reflect sunlight back at the solar modules. The membrane serving as a roof does not add to the electricity generation, but the additional cost of the white coating seems to be a part of the electricity generation.
While all of the project costs would be subject to the depreciation rules, only the costs determined to be eligible for the ITC can have the 30 percent credit calculated. This difference between the total cost and the ITC eligible cost is a gap that project developers are constantly trying to keep as small as possible, hoping to maximize the credit they are eligible to take.
Here are some common costs that are not eligible for the ITC:
- Building improvements
- New roof
- Interconnection costs
- Security cameras
- Artificial lighting
- Paving and landscaping
- Legal costs for financing
- If there is an existing interconnection, or one that can be shared, the cost for the interconnection will be greatly reduced. If the utility has to run a new interconnection out to the project, that can get fairly costly. Looking for good sites near existing interconnections can help keep that cost down.
- Working with a legal and banking team that are familiar with solar projects and have already developed a standardized template can help keep legal and financing costs down as well. Oftentimes, we see models that have not considered the cost of these line items. It is important to have a strong team in place to help push the project forward and to have clearly budgeted costs that can be planned for.
- If the building needs a new roof anyway, contract separately for the roof to be replaced outside of the solar project. The customer still bears the cost for the new roof, but separating that cost outside of the solar project contract removes the need to separate out the cost after the fact.
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