The solar Investment Tax Credit (ITC) provides a federal tax credit for commercial properties that generate electricity through solar, geothermal, microturbine and other renewable means (26 U.S.C. § 48). The ITC was first promulgated under the Energy Policy Act of 2005, and it was later expanded by the Energy Improvement and Extension Act of 2008 and the American Recovery and Reinvestment Act of 2009.

The ITC allows a credit of 30% of the eligible tax basis of a commercial property, which is a dollar-for-dollar reduction in the income taxes owed by the project owner. This 30% credit is only available for projects "placed in service" by December 31, 2016. For projects placed in service on or after January 1, 2017, the available tax credit drops to 10% of the eligible tax basis of the property.

Since its inception, the ITC has fueled the growth of the solar energy industry by creating jobs, lowering consumer costs and providing renewable energy. However, without the 30% tax credit, or even with the reduced 10% tax credit, large commercial solar energy projects may become prohibitively expensive and economically unviable.

A new commercial solar energy project can take well over two years to design, construct and permit, all of which are necessary for the project to be "placed in service." This leaves prospective owners and current owners of fledgling projects in the tough position of trying to estimate whether their project will be placed in service by the statutory deadline to take advantage of the 30% tax credit. At least one large-scale project in Riverside County, California, has been cancelled already due to concerns about missing the placed in service deadline.

In deciding whether to move forward with their projects, owners, lenders and their counsel are concerned about the subjective nature of the placed in service deadline since there is no bright-line test to determine when a project has been placed in service. Instead, the IRS and courts look at several factors to determine if a solar project is placed in service, including:

Solar energy project owners, lenders and their counsel should act promptly to meet the current placed in service deadline of December 31, 2016, for projects already underway. This may include increasing oversight of construction, testing, permitting and licensing and developing plans in advance to deal with any potential setbacks that might occur.

The Solar Energy Industries Association (SEIA) is lobbying both the House and Senate to amend the ITC's deadline to mirror the Production Tax Credit (PTC), the primary federal tax subsidy for wind and hydroelectric projects, which uses a "commenced construction" threshold in determining whether a project may receive a tax subsidy.

If the proposal passes, any commercial solar energy project that commences construction by December 31, 2016, will receive the 30% tax credit, alleviating the pressures of the guessing game faced by project owners, project lenders and their counsel under the current legislation. Unfortunately, whether Congress will pass legislation amending the current ITC deadline is uncertain. Prospective owners of solar projects in the initial stages of development should closely monitor legislative developments and consider seeking alternative financing arrangements.