The federal solar investment tax credit (ITC) is a tax credit that can be claimed on federal corporate income taxes for a percentage of the cost of a solar photovoltaic (PV) system that begins construction during a tax year.
Solar Projects are one of the most economically friendly energy efficiency projects, not just because of the savings you will incur from the actual solar photovoltaics (PV) system you install at your facility, but also because these types of projects are highly supported by the federal government.
The Solar Investment Tax Credit percentage decreases over time.
A newly passed law added a two-year solar tax credit extension of the current 26 percent credit for projects that begin construction through the end of 2022, as opposed to expiring at the end of 2020 under the old law. The credit will decrease to 22 percent for projects that begin construction by the end of 2023, and then to 10 percent for larger solar projects and zero percent for small projects that begin construction in 2024.
What costs qualify for solar credit?*
To be eligible for the business ITC:
- Your business must be subject to U.S. federal income taxes.
- Your solar project must use mostly new equipment with limited previously used equipment.
- Your solar PV project cannot be used to heat a swimming pool.
What has to happen before the federal government considers a solar project has begun?
- Once at least 5% of the final qualifying project costs are incurred.
- Expenses have to be “integral” to generating electricity.
- Equipment and services have to be delivered (or delivered within 3.5 months after payment) OR “Physical work of significant nature” has commenced on the project site or on project equipment at the factory. Physical work has to be “integral” to the project. Preliminary activities on site, like building a fence or an access road, do not count as “integral.” The project does not require proof of continuous work if the system is placed in service within four years.
How is the ITC calculated?
You can figure out your savings by multiplying the applicable tax credit percentage (depending on when you commence the project) by the amount invested in eligible expenses.
For example, let’s say your business uses the calendar year as your tax year. You began the construction of a $1,000,000 solar PV system in 2021 and placed it in service in 2023. Your solar PV property is eligible for a 26% ITC. When the tax basis is $1,000,000, the 26% ITC reduces tax liability by $260,000.
What are considered eligible expenses?
Eligible property includes:
- Solar PV panels, inverters, racking, balance-of-system equipment, and sales and use taxes on the equipment
- Installation costs and indirect costs
- Step-up transformers, circuit breakers, and surge arrestors
- Energy storage devices (if charged by a renewable energy system more than 75% of the time)
You can take advantage of accelerated depreciation and bonus depreciation.
You may also be able to take advantage of accelerated depreciation (Modified Accelerated Cost-Recovery System, or MACRS) to reduce the overall cost of a solar PV project. If you claim the ITC for your solar PV installation, accelerated depreciation rules allow the full tax basis minus half the ITC to be depreciated over a five-year MACRS depreciation schedule using a half-year convention. Any unused depreciation can be carried forward indefinitely.
You can also elect to claim a depreciation bonus. The Tax Cuts and Jobs Act of 2017 increased bonus depreciation to 100% for eligible projects commissioned and put into service after September 27, 2017 and before January 1, 2023. After that, the percentage drops 20% per year until it reaches 0% in 2027.
Ready to get started?
Don’t wait, the two-year solar tax credit extension will be here and gone before you know it. The original ITC was 30 percent. That’s why it hurts to wait on your solar project! The sooner you get the conversation started…the more likely you will be able to secure the highest percentage of tax credits available for your solar project.
On top of that, a completed solar project offers dozens of benefits, including use of a 100% clean, renewable energy source, the opportunity to be energy independent and less reliant on your utility provider, cheaper utility bills, decreased maintenance costs, and a stronger brand equity.
We want to help you find the ideal solar project for your needs. U.S. Energy Recovery will listen to you and design and build a custom solar project for your facility. We can’t wait to learn more about your business and use our decades of experience in the energy efficiency industry to make your project a reality. Schedule a time to talk or reach out directly to 800-834-8737.
For more information on the ITC for businesses, check out this guide from the U.S. Department of Energy.