Secure the Commercial Solar Tax Credit Before It's Gone — The 5% Safe Harbor Strategy
- Drew Mays
- Jun 16
- 6 min read
Bottom Line Up Front: Understanding the Safe Harbor Strategy for Commercial Solar Projects
TL;DR: Draft federal bills could eliminate critical solar tax credits and incentives as early as 2028. The "safe harbor" strategy—spending just 5% of your project cost before new legislation takes effect—can preserve the 30% Investment Tax Credit (ITC) for your ESG-focused commercial solar investment.
Risk Assessment for Commercial Energy Users: Organizations planning utility-scale solar installations (~1 MW systems) face significant financial exposure if tax incentives are eliminated. Understanding safe harbor provisions can help secure these benefits for multi-year project development timelines.
Scenario | ITC Rate | Net Tax Credit on Typical Project |
|---|---|---|
Safe harbor in 2025 | 30% (base ITC) | Maximum Available Credit |
Wait until 2026 | 18% (Senate glide-path) | Substantial Reduction |
Wait until 2027 | 6% | Minimal Credit Available |
Wait until 2028 | 0% | No Credit Available |
(House bill ends the credit 60 days after enactment; Senate bill phases it out: 60% → 20% → 0%.)
Why the Urgency? Two Competing Bills, One Common Theme: Reduced Solar Support
The commercial solar industry faces an unprecedented legislative challenge from two proposed bills, both aimed at rapidly reducing or eliminating the tax incentives driving America's clean energy growth.
House "Build It in America Act 2.0"
The House bill would terminate the ITC just 60 days after enactment. For organizations evaluating projects, this creates a critical planning consideration: if this bill passes, the traditional end-of-year safe harbor deadline would be replaced by a 60-day window from enactment. During this period, organizations can still utilize safe harbor provisions by spending 5% of project costs on qualifying equipment.
Senate Finance Draft (June 2025)
The Senate proposes a more gradual transition with clear milestones:
2026: ITC reduced to 60% of current value (18% effective rate)
2027: ITC reduced to 20% of current value (6% effective rate)
2028 and beyond: 0% credit available
Both bills set December 31, 2028, as the final deadline for project completion, regardless of when construction begins. This creates important considerations for organizations planning multi-year project timelines.
Strategic Considerations for Project Planning
Organizations evaluating solar initiatives for 2026 or 2027 should understand how these proposed changes could impact their renewable energy strategy and financial planning.
Expert Advisory Approach
At Innovate Energy Group, we help clients navigate these evolving policy considerations with comprehensive analysis and strategic guidance. Our role is to ensure organizations have the information needed to make informed decisions about their solar investments and timelines.
Addressing Capital and Timeline Flexibility
We recognize that accelerating project timelines can strain capital budgets. For organizations facing these challenges, we offer solutions such as Power Purchase Agreements (PPAs) and zero-interest project financing options to overcome capital constraints while preserving access to current incentive levels.
Safe Harbor 101 (Commercial Edition)
Safe harbor means "beginning construction" in the eyes of the IRS before the deadline. For commercial operations, there are two pathways to achieve this critical milestone:
Two Pathways to Commercial Safe Harbor
Physical Work Test -Initiate excavation, transformer fabrication, or other significant physical work on the project site. While this provides clear evidence of construction commencement, it requires coordinating multiple contractors and is subject to weather-dependent activities.
5% Cost-Incurred Test (Preferred for CFOs): Spend at least 5% of the total project cost on modules, racking, or inverters and take delivery within approximately 3.5 months. This approach offers superior predictability and documentation for commercial operations.
Why the 5% Path Wins for Most CFOs
Predictable: Issue one purchase order, wire funds, and document delivery—no weather delays or contractor coordination issues.
Scalable: Works seamlessly for multi-site portfolios, enabling phased development across facilities.
Audit-Ready: Creates a clear paper trail that satisfies IRS requirements and corporate auditors.
Example for a Typical Commercial Project:
Spend 5% of total project cost on modules by October 31, 2025
Preserve the full 30% ITC → substantial ROI protection
Complete construction by December 31, 2028 (four-year continuity safe harbor)
Project Development Timeline and Flexibility
Date | Milestone |
|---|---|
August 31, 2025 | Complete project evaluation and feasibility assessment |
September 30, 2025 | Finalize equipment specifications and vendor selection |
October 31, 2025 | Execute safe harbor strategy (5% equipment purchase) |
November 30, 2025 | Confirm equipment delivery and documentation |
Critical Note: Equipment delivery must be reasonably expected within 3.5 months of payment to maintain IRS compliance.
The Four-Year Commercial Advantage
Continuity Safe Harbor for Large Projects
Once safe harbor is established through the 5% test, the IRS allows up to 48 months (four years) to complete the project while maintaining the locked-in 30% ITC rate. This extended timeline offers significant strategic advantages for commercial operations.
Flexible Project Development Strategy:
2025: Secure project benefits through safe harbor (5% equipment investment)
2026–2028: Proceed with project development at a pace aligned with operational and financial planning
Project Completion: Complete installation and commissioning within the four-year safe harbor window before 12/31/2028
Result: Preserved tax benefits with a flexible project timeline that meets your organization's needs
This approach allows organizations to secure current incentive levels while maintaining flexibility in project execution based on budget cycles, operational priorities, and strategic planning.
Large-Scale Project Management
Continuity Requirements: After establishing safe harbor, continuous progress toward project completion is required within the four-year window to maintain IRS compliance.
Professional Guidance: We recommend working closely with your tax advisors to ensure proper documentation and compliance with all applicable requirements.
How Innovate Energy Group Supports Your Solar Strategy
Our Strategic Approach
We help organizations understand their options and develop informed renewable energy strategies:
Project Assessment: We evaluate your solar potential and explain how current policy considerations might affect your timeline and approach.
Strategic Planning: Our team collaborates with you to develop a renewable energy strategy aligned with your ESG goals, budget cycles, and operational requirements.
Implementation Support: When you're ready to proceed, we provide comprehensive project development services, from initial design through commissioning.
Quarterly Progress Reviews: Ensure your project stays within the four-year window and captures additional state incentives while maintaining flexible development timelines.
FAQs
Q: Can we safe harbor multiple facilities separately?
A:Â Yes. Each site can meet the 5% test on its own timeline, providing phased development flexibility across your commercial portfolio.
Q: Does safe harbor work with a PPA or lease structure?
A:Â The House bill would deny credits for leased property, making direct ownership the safest path. This underscores the importance of safe harboring to maintain tax benefits.
Q: What's the minimum project size for safe harboring?
A:Â The IRS sets no minimum, but larger commercial projects yield stronger ROI on the 5% investment due to substantial tax credit values and operational scale.
Q: How do depreciation rules interact with safe harboring?
A:Â Safe harbor preserves MACRS and bonus depreciation benefits, but the House bill would revoke five-year property treatment for projects placed in service post-enactment.
Q: Can we modify our project design after safe harboring?
A:Â Reasonable modifications are permitted as long as the core scope remains substantially similar to what was initially safe harbored.
Q: What's the advantage of commencing construction vs. completing the project?
A:Â Unlike residential solar, which must be "placed in service" before the deadline, commercial projects only need to commence construction (via the 5% safe harbor) by December 31, 2025, with up to four years to complete while maintaining the 30% ITC rate.
Q: What documentation does our commercial operation need?
A:Â Critical documents include purchase contracts, delivery receipts, payment records, warehousing documentation, and evidence of continuous project development. We assist clients in maintaining comprehensive compliance files.
Q: Do we need to finish the project by a specific date after commencing construction?
A:Â Yes, projects that begin construction in 2025 must be completed by December 31, 2029, with continuous progress to maintain tax credit benefits.
Q: How does this work with commercial accounting and cash flow?
A:Â The 5% safe harbor investment can often be structured as inventory or prepaid project costs, while preserved tax credits significantly improve project IRR and cash flow projections for sustainability investments.
Ready to understand how safe harboring applies to your commercial solar project?
 Contact Innovate Energy Group today for an educational consultation on safe harbor strategies. Our experts will help you understand the options, timeline, and considerations relevant to your sustainability goals and project parameters.
We are not tax advisors. Consult your CPA for formal tax opinions. The information in this article is for educational purposes only and should not be considered tax or legal advice.