Sharon Lee • Published December 7, 2022 • Updated on February 20, 2023 • [rt_reading_time postfix=”minute”] read
In August of 2022, President Biden signed the Inflation Reduction Act (IRA) into law, enhancing the existing Solar Investment Tax Credit. It’s expected that this new law will spark tremendous growth in solar and renewable energy adoption, making it a significant step in addressing climate change.
But what does the IRA mean for business owners looking to invest in solar? Well, it’s all good news. Early estimates from the US Solar Energy Industries Association project the US solar industry to expand by 60% in residential installations and 40% in commercial projects, all directly attributable to the IRA.
This article provides a summary of the benefits the IRA offers to businesses looking to install a solar energy system. As you read this, a significant amount of additional guidance is being developed from the US Treasury Department and the Internal Revenue Service to help Velo and its clients maximize the value creation opportunities of the IRA. So stay tuned to our blog for more details as they emerge.
We recommend you partner with a trusted commercial solar provider like Velo Solar to help you design a solar system that will meet your needs and maximize your tax credits. That said, this is neither legal nor tax advice.
To understand the significance of this new legislation, let’s take a brief look at the state of the Solar ITC prior to August of 2022.
When it was first introduced in 2006, the Solar ITC offered a 30% tax credit on commercial solar projects started between 2006 and 2019, so long as they were put in service by 2026 (or 2024 in some cases).
The credit stepped down to 26% in 2020 and was due to drop to 22% in 2021.
In December of 2020, Congress decided to alter the ITC step down schedule as a part of its COVID-19 relief spending.
According to the revised 2020 rules, commercial solar projects that began construction in 2021 or 2022 were eligible for a 26% federal tax credit.
Those starting construction in 2023 would have received a 22% federal solar tax credit.
In 2024, the credit for commercial solar systems was to drop to 10% and remain there in perpetuity.
The long-term commitment to renewable energy that the federal government is making with the Inflation Reduction Act is a total game changer for businesses looking to invest in solar panels and energy storage systems.
First, the new law eliminates the Solar ITC step down for the next decade, setting the tax credit at 30% through 2032. The chart below shows how this move significantly decreases investment costs for commercial solar installations, especially those that don’t commence construction this year.
The chart assumes a $250,000 solar and battery storage system.
The difference for systems installed between 2024 and 2032 is staggering. Reducing your tax liability by $50,000 makes renewable energy accessible to more business owners – especially when considering the other benefits, including reduced energy costs, that you’ll also see with solar powering your business. Why send extra money to Uncle Sam when you can reinvest it in your business and improve your bottom-line over time?
The IRA also ties incentives to the originally established year and aligns with total costs known, versus forecasted costs. This eliminates the complexity of trying to get a multi-year extension on a given project and dealing with safe harbor.
In 2025, the IRA transitions to a technology neutral, emissions-based program called the Clean Electricity Investment Tax Credit (CEITC). Any clean energy generating facility, including solar, will qualify for the tax credit, so long as it doesn’t emit greenhouse gases.
It’s expected that a step down schedule for the CEITC will begin after 2032 and will be based on learnings gleaned over the decade as well as subsequent changes in federal policy as legislation on de-carbonization and combating climate change is developed.
If you installed solar at your business in 2022, check with your solar provider and tax advisor to see if your system retroactively qualifies for the 30% tax credit. Certain commercial projects placed in service after December 31, 2021, and before the law was signed, may be eligible to receive the full 30% credit.
The IRA does not include a retroactive credit rate change for commercial projects placed in service in 2021 or prior years.
The IRA requires that projects larger than 1 megawatt meet prevailing wage & apprenticeship requirements to receive the full 30% federal solar tax credit. This means that the folks building your solar system must be paid the applicable wage, as determined by the Secretary of Labor. It also requires the construction crew include apprentices. To ensure you receive the full credit, make sure your solar company meets these requirements.
Velo and its subcontractors have been paying wages higher than the requirement since before the IRA’s passage. We have been working actively with subcontractors and community partners to develop a solar apprenticeship program over the last several years and are excited that this aspect of the bill will lead to more new folks entering the solar industry.
The second big change with the IRA is that 30% is now just the base credit. If you qualify, you can reduce your solar system costs even further by stacking the following bonus tax credits.
THIS IS THE TRICKY PART of the IRA and much more guidance needs to be given on how this will work in an already complicated tax code.
Solar systems installed in what the federal government deems an “energy community” may be eligible for additional tax relief. Energy communities include some brownfield sites, low-income communities, tribal lands, and areas where coal mines or coal-fired electricity generation plants have been shuttered. The energy community designation comes a previous bill called the Energy Policy Act. Guidance is needed as to how it applies in the IRA.
There are limits on the size of the system (it must be less than 5 megawatts, producing no more than 1.8 gigawatts per year), but if your solar project qualifies, you’ll get an additional 10% tax credit.
If your solar installation is located in an energy community, you should also check with your provider to see if your solar equipment meets the domestic content requirements. Eligible systems will receive an additional 10% in residential or commercial ITC.
The third big change with the IRA is the introduction of direct payment. Previously only taxpaying businesses qualified for the commercial Solar ITC.
Now, tax-exempt entities like cities, non-profits, schools, and faith communities can reduce their overall solar installation costs through the direct pay option. This is essentially a “refundable” tax credit that’s claimed for the tax year that the system is put into service.
Of note, the payment is reduced if domestic content requirements are not met.
Velo is developing a Lease-to-Own program for non-profits to take advantage of this transferability and gain access to the solar investment tax credit. This will make solar economical for them in ways that it was not in the past. In many cases, we are able to make the system cost-neutral for the non-profit by utilizing their energy savings to service to the debt. Contact Velo Solar for more information on this program.
Finally, interconnection costs, or those fees associated with connecting your solar installation to the electric grid, may be included in the figure used to calculate the amount of your credit under the IRA. Previously, these costs were excluded.
The IRA incentivizes the electrification of commercial fleets with a tax credit for qualified commercial clean vehicles that are placed in service after December 31, 2022.
Installing solar powered EV charging infrastructure in addition to your solar panels and energy storage system will maximize your solar investment and reduce operating costs even further (you can eliminate fuel costs by charging your fleet with electricity from your solar panels).
Plus, the IRA also allows general consumers to claim a tax credit for the purchase of a qualifying new or used electric vehicle. Making your solar powered charging infrastructure available to your employees is a great perk. It also shows your commitment to reducing emissions across your entire organization – and that’s a great way to win new customers.
Starting in 2023, the IRA will permit a one-time transfer of the tax credit to another taxpayer. This provides solar customers with more flexibility. If you’re working with the right partner, this could act as a dollar for dollar reduction on the cost of solar installed.
Starting in 2023, the IRA will permit standalone battery storage projects to apply for the full 30% tax credit, even if they aren’t connected to a solar project. This gives a system owner increased flexibility when phasing-in a renewables strategy. It also allows residential and commercial customers to prioritize resiliency and energy flexibility without sacrificing ITC eligibility.
The IRA is expected to encourage electrification across all sectors of the economy and spur the already fast-growing solar industry. But, the ins and outs of the law are complicated. You should always consult with your accountant to understand your specific tax situation and how to best apply the solar tax credits.
You should also partner with a reputable commercial solar provider like Velo Solar. Velo has the experience, expertise, and a design-build approach to deliver solar systems that meet your energy goals and maximizes the federal credits available to you. We will continue to share guidance on our blog as it is developed.
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