Solar ITC: The Complete Guide to the Investment Tax Credit
Sharon Lee • Published June 17, 2022 • Updated on February 20, 2023 • [rt_reading_time postfix=”minute”] read
Solar Feasibility Study: Is Solar Right for Your Business?
If you’re interested in installing a solar energy system at your business, there’s good news. The Federal government wants to help reduce your costs with the Solar Investment Tax Credit, also known as Solar ITC.
This federal tax credit is available to companies installing a qualified commercial solar energy project, and like most things involving the government, it can be a little complicated to understand. Read on to learn more about the federal solar tax credit and to see if your solar energy system could qualify.
Table of Contents
What Is Solar ITC?
The federal solar tax credit has been around for several years. When it was first introduced in 2006, it offered a 30% tax credit on commercial solar projects that were started between 2006 and 2019, so long as they were put in service by 2026 (or 2024 in some cases).
The tax credit stepped down to 26% in 2020 and was due to drop to 22% in 2021. Ultimately the credit would have stepped down to nothing. In December of 2020 however, Congress decided to alter the tax credit step down schedule as a part of their COVID-19 relief spending.
As a result of that decision, qualifying commercial solar projects will be eligible for a tax credit in perpetuity, and it may become a direct-pay credit for solar without tax obligations. This would allow non-profits, schools, faith community solar projects, and others that didn’t qualify previously to qualify.
The Federal Solar Tax Credit Decreases Over Time
Like the previous iteration of the solar investment tax credit, the current legislation outlines a step down that gradually reduces the amount of credit available over time. According to the revised rules, solar system projects that began construction in 2021 or 2022 are eligible for a 26% federal tax credit.
Solar projects started in 2023 can receive a 22% federal solar tax credit.
In 2024 and beyond, the federal tax credit for commercial solar energy systems will drop to 10%. But that 10% is permanent and will not expire.
Ask Congress to increase and expand the credit for solar by emailing your representative today – https://www.congress.gov/members/find-your-member.
While any tax credit is better than none, the difference between 26% and 10% may make it advantageous to start your project sooner rather than later.
It’s also important to note that companies installing commercial solar systems don’t need to use the entire tax credit in a single year. You can spread the credit out over multiple years, so based on your company’s situation, you could significantly reduce or eliminate your tax liability for several years.
Accelerated Depreciation
Companies that install ITC-qualified commercial solar projects typically can also reduce the overall cost of their project by accelerating their depreciation schedule in as little as one-year.
You should consult your accountant to understand your specific tax situation and how to best apply the solar tax credit.
Calculating your tax credit
The solar investment tax credit is a dollar for dollar reduction on the federal income tax that your company would pay to the Internal Revenue Service each year. But how do you know what your credit will be?
Defining “commenced”
The Internal Revenue Service calculates your federal solar tax credit based on when your solar project commenced. Commencement, or the start of construction, can be based on the amount of qualifying project costs that have been incurred in a calendar year.
If you’ve invested 5% of the total solar system cost on integral equipment and services in 2021 or 2022, for example, you’d be eligible for a 26% tax credit. If those costs land in 2023, you’d be eligible for a 22% federal solar tax credit.
The U.S. Department of Energy also considers a solar project to have been started if “physical work of significant nature” had begun at either the project site or at the factory.
Using this definition, you’d qualify for a 26% reduction in your federal taxes if the manufacturer started making your solar panels or racking system in 2021 or 2022.
It’s important to note that to qualify, the work must be integral to the project. Just clearing the site for your future solar PV system won’t meet the government’s standard.
Four years for construction
Whether you’re using the investment test or the physical work standard to determine your tax credit, you have to keep the construction ball rolling. One of the stipulations of the program is that you have your solar system commissioned in no more than four years from the start of construction.
The Fine Print
Naturally, as with any government program, especially one related to U.S. tax code, there is some fine print. Here are a few things you should be aware of when investigating how to maximize the federal solar tax credit.
Does your solar energy system qualify?
Not all commercial solar systems are eligible for the tax credit.
First, you have to be a business that pays U.S. federal income tax to qualify. If you’re a tax-exempt charity, for example, your solar system won’t be eligible. But if you own a car dealership that wants to use renewable energy to keep the EVs on your lot charged, or you’re a food processor looking to keep operations running in the aftermath of a hurricane, you’ll qualify.
Second, your business and your new solar system must be located either in the U.S. or one the U.S. territories.
Third, to qualify for the tax credit, your solar system must use primarily new equipment. Some limited use of used equipment is allowed.
Which expenses qualify?
Not all of the costs related to your new solar system are eligible expenses in the eyes of the IRS. Fortunately, their list includes all of the big ticket items.
In terms of solar equipment, solar panels, inverters, racking systems, step-up transformers and other technology commonly used by solar installers are eligible, as are the use and sales taxes on that equipment.
The fees you pay to the vendor that’s installing solar at your business are also covered.
Finally, energy storage devices, such as the batteries critical to insuring resilience during a grid outage, qualify so long as they are installed in conjunction with solar panels. Congress is considering a stand-alone ITC for batteries.
Other solar tax credits
There are other tax credits available, and you should check with your local utility and your state income tax authority to see if they have programs or incentives that can further reduce your solar installation costs.
It’s important to note that a state tax credit or rebates from your utility may be considered taxable income and do not impact the tax basis when calculating your federal solar tax credit.
A solar industry leader like Velo Solar can help you navigate the ins and outs of these different solar tax credits. They can also help you explore other financing options such as a power purchase agreement or a traditional operating lease.
Benefits of the solar investment tax credit
There are many excellent reasons for business owners to take advantage of the investment tax credit.
The ITC makes renewable energy affordable
Perhaps the biggest selling point of the investment tax credit is that it makes renewable energy accessible to more businesses. By reducing a company’s tax liability, the ITC frees up funds for other critical business operations such as hiring, upgrading equipment, and more. All while also giving you the power to make the best energy choices for your business.
Solar is good business
Installing a solar power system is just good business, whether you choose solar PV panels on your rooftop, a solar carport, a ground-mounted solar array, or a combination of all three. In addition to reducing your tax liability, solar can reduce your energy costs by producing a portion of, or even all of your energy needs.
If you’re generating your own electricity, your energy costs will be more predictable and your bottom line won’t be as impacted by rising and unpredictable energy prices from your utility, allowing you to control costs and hedge inflation.
Solar provides resilience
A solar PV system can also provide resilience when paired with a battery storage system. If the grid goes down in a storm, or if you’re subject to public safety power shut offs, your solar + battery system can keep operations running until the power comes back on.
The electricity generated by your solar photovoltaic system keeps your batteries charged so you can keep operations going 24/7.
The solar tax credit supports a renewable energy future
The Biden administration has set a goal of achieving net-zero greenhouse gas emissions across the entire U.S. economy by 2050. Changes are coming and renewable energy will be a big part of achieving that lofty goal.
Solar reduces your carbon emissions
Large companies like Apple and Tesla have vowed to reduce their carbon emissions through the use of renewable energy. They’ve also announced that they want to work with like-minded vendors. But it’s not just the big conglomerates hopping on the solar bandwagon.
Your customers, whether they be other businesses or the general consumer, are looking to do business with organizations focused on sustainability. Investing in a solar PV system is a great way to gain a competitive advantage in your market, supporting your sustainability goals as well as your marketing goals.
The federal investment tax credit can make your entry into solar that much more affordable and beneficial.
Creates new jobs
It turns out that the solar tax credit is also great for the solar industry. Not surprisingly, the ITC has spurred incredible growth in the solar industry, creating thousands of good paying jobs. The Solar Energy Industries Association (SEIA) puts industry growth at more than 10,000% over the last several years!
By working with a local company on your solar PV project, you’re also reinvesting in your community and neighbors.
For all these reasons and more, smart businesses are taking advantage of the solar tax credit to reduce their federal taxes, lower their utility costs, make their operations more sustainable, and improve their resilience.
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