Tax Credits for Your Business
Solar is the financially smart choice, especially with tax incentives and grants.
Commercial Tax Incentives
The Inflation Reduction Act (IRA) of 2022 extended the existing investment tax credit ("ITC") for solar until 2032. IRA hopes to relieve Americans of their dependence on oil and gas from abroad. In addition, battery storage is now included for tax credits.
Investment Tax Credit (ITC), Commercial - 30%
The Inflation Reduction Act (IRA) of 2022 establishes and extends the federal Investment Tax Credit (ITC) for solar photovoltaic (PV) systems at a rate of 30% of the total PV system cost. The 30% ITC was extended for 10 years, through 2032. Unlike tax deductions, this tax credit can be used to directly offset your tax liability dollar for dollar.
The IRA extended the carryback period to 3 years, and the carryforward period to 22 years, in cases where the tax credit exceeds a customer’s tax liability in the ‘placed-in-service’ year. For PV projects greater than 1 MW AC in size, the IRA established prevailing wage and apprenticeship requirements in order to qualify for the full 30% “increased rate”, rather than a “base rate” which would only qualify for a 6% ITC. Projects with an output of less than 1 megawatt qualify for the “increased rate” irrespective of if prevailing wage or apprenticeship requirements are met.
Federal MACRS (Modified Accelerated Cost-Recovery System)
Under the federal Modified Cost Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. MACRS establishes a lifespan for various types of property over which the property may be depreciated. For PV systems, the taxable basis of the equipment must be reduced by 50% of any federal tax credits associated with the system.
Hawaii Corporate Tax Credit
Originally enacted in 1976, the Hawaii Energy Tax Credits allow individuals or corporations to claim an income tax credit of 35% of the cost of equipment and installation of a photovoltaic (PV) system. For commercial photovoltaic systems, the maximum allowable credit is $500,000. For taxable years beginning after December 31, 2005, the dollar amount of any utility rebate must be deducted from the cost of the qualifying system and its installation before applying the state tax credit.
Energy Storage System (ESS) Tax Incentives (Battery Storage)
Federal MACRS (Modified Accelerated Cost-Recovery System) (ESS)
Under the federal Modified Cost Recovery System (MACRS), businesses may recover investments in certain properties through depreciation deductions. MACRS establishes a lifespan for various property types over which the property may be depreciated. For ESS systems, the taxable basis of the equipment must be reduced by 50% of any federal tax credits associated with the system.
Investment Tax Credit (ITC), Commercial - 30% (ESS)
The Inflation Reduction Act (IRA) of 2022 established a federal Investment Tax Credit (ITC) for energy storage system (ESS) projects at a rate of 30% of the total ESS system cost. The IRA explicitly stated that the 30% ESS ITC was applicable for standalone ESS projects, and also ESS projects paired with a solar PV system. The ESS ITC was established for 10 years, through 2032. Unlike tax deductions, this tax credit can be used to directly offset your tax liability dollar for dollar.
The IRA allows a carryback period of 3 years, and the carryforward period of 22 years, in cases where the tax credit exceeds a customer’s tax liability in the ‘placed-in-service’ year. For ESS projects greater than 1 MW AC in size, the IRA established prevailing wage and apprenticeship requirements in order to qualify for the full 30% “increased rate”, rather than a “base rate” which would only qualify for a 6% ITC. Projects with an output of less than 1 megawatt qualify for the “increased rate” irrespective of if prevailing wage or apprenticeship requirements are met.
Grants
USDA - Rural Energy for America Program (REAP) grant, IRA
The Rural Energy for America Program (REAP) provides financial assistance to agricultural producers and rural small businesses to purchase, install, and construct renewable energy systems. The REAP grant solicitation states that to be eligible, an applicant must have a satisfactory revenue stream and be in control the budget, operations, and maintenance of a project for the entire duration of the loan or grant. Rural small businesses must be located in rural areas, but agricultural producers may be located in non-rural areas. Per the Inflation Reduction Act (IRA), signed into law on 8/16/2022, the REAP grant can cover up to 50% of the cost of a project, doubling the existing grant-based cost-share level of 25%. Grants are competitive and awarded at various incentive amounts, therefore users are prompted to define their REAP grant amount.
Common questions about IRA
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Panels: The credit covers solar PV panels or PV solar cells.
Additional equipment: The credit covers other solar system components, including the balance-of-system equipment and wiring, inverters and other mounting equipment.
Batteries: The ITC covers storage devices, such as solar batteries, charged exclusively by your solar PV panels. It also covers storage devices activated in a subsequent tax year to when the solar energy system is installed. Beginning on Jan. 1, 2023, stand-alone energy storage that doesn’t charge solar panels exclusively will qualify for the ITC credit.
Labor: Labor costs for on-site preparation, assembly or original solar installation are covered. This includes permitting fees, inspection costs and developer fees.
Sales tax: The credit also covers sales taxes applied to these eligible expenses.
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However, the IRA does permit you to get smart with your accounting by permitting tax credit carrybacks of 3 years and carryforwards of 22 years, which allows you to move a credit to a different year or years and reduce the tax liability there.
Carrybacks mean you can use these credits to amend a previous year’s return, offset profits and get an immediate refund on taxes you paid.
Carryforwards work on the same basic principle of reducing the liability of a different year’s profits than the year the credit is available to the project. A carryforward does require planning; you will need to let the IRS know it is coming by making an election on your return.
Typically, both carrybacks and carryforwards are capped annually, but you may continue to spread out the credit at the maximum annual amount for the duration of the allowable time – either 3 or 22 years. The same is true if your tax liability is not big enough in a particular year to take full advantage of the credit; you may move the balance to other years as necessary. Monetize Your Credits, Baby Don’t want to use credits to offset your taxes? Fine – now you can monetize them. *Happy dance* One way is to choose direct pay under Section 6417, in which you can elect to take cash in lieu of tax credits. This action is available to the ITC, PTC, and other credits (providing certain conditions are met).
Great News for Tax-Exempt Entities
The Inflation Reduction Act includes a provision allowing tax-exempt entities to receive the solar investment tax credit as a direct payment.
Now, tax-exempt organizations like public schools, cities, and nonprofits can get credits by direct pay, and receive a check for 30% of the project cost just like a tax-paying entity would receive the credit when filing taxes. Direct pay makes it more accessible for organizations to own solar projects.
Featured Project: Solar PV and hydro system for the non-profit, The Limahuli Garden and Preserve, a 17-acre botanical garden and 985-acre nature preserve.
How to Meet the IRA Bonus Tax Credits For Commercial Solar Projects
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You can get additional credits for both PTC- and ITC-eligible projects if you take the time to source materials from the United States. Specifically, to earn the credit:
All iron and steel components must be domestic
At least 40 percent of manufactured products (accounted for by cost) must be manufactured domestically
Check both boxes, and you can get an additional 10%.
Meet any of the above requirements, and you can percent tax credit. Note: if you fail to meet the wage and apprenticeship requirements, the bonus credits are also reduced to 20 percent of what they would otherwise be.
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Another way to nab a bonus is to site your development in an energy community. An energy community is defined as:
A brownfield site, which is a piece of property on which the presence of a contaminant or certain previous activities complicates its use for residential and many commercial purposes.
A metropolitan statistical area with .17+ percent direct unemployment related to various fossil fuels and their manufacture or 25+ percent tax revenues related to such.
A metropolitan statistical area that has an unemployment rate that exceeds the previous year’s national average.
A census tract or tract next to a census tract on which a coal mine closed after 1999 or a coal-fired electric generating unit closed after 2009 17 scoop another 10 percent of the project price out of your tax liability. Huzzah!
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Projects can get an additional 10 percent credit by locating the project in a low-income community or 20 percent by making them part of a qualified federally subsidized affordable housing project. Wind and solar facilities should be less than 5 MW to be eligible for these credits.