Understanding Solar Tax Incentives for Business

Investing in solar energy is one of the most impactful decisions a business can make. It not only reduces operational costs and enhances corporate sustainability but also provides significant financial returns through various tax incentives. For large-scale solar companies, understanding these incentives is crucial for demonstrating value and securing commitments from commercial clients.

Understanding solar tax incentives available for commercial solar businesses in the United States can help you prepare budgets and strengthen your project proposals. Let's explore how these programs work and how companies can leverage them to maximize financial benefits.

The Investment Tax Credit (ITC)

The Solar Investment Tax Credit (ITC) is one of the most significant financial incentives for adopting solar energy. Originally established by the Energy Policy Act of 2005, it has been a major driver of solar adoption nationwide. The Inflation Reduction Act of 2022 extended and restructured the ITC, providing long-term certainty for the solar industry.

For commercial solar projects, the ITC allows businesses to claim a tax credit equal to a percentage of the project's total cost.

How the ITC Works

The ITC is a dollar-for-dollar reduction in a company's federal income tax liability. For projects that began construction in 2022 or later and meet specific labor requirements, the base credit is 30 percent of the eligible project costs.

Eligible costs typically include:

• Solar panels or photovoltaics (PV)
• Inverters and other power conditioning equipment
• Racking and mounting hardware
• Balance-of-system equipment
• Installation and labor costs
• Energy storage systems (when charged by the solar array)
• Interconnection and permitting fees

For a project to qualify, construction must commence before a specified deadline. The IRS defines "commence construction" as either starting significant physical work on-site or incurring at least 5 percent of the total project cost.

Bonus Credits: Maximizing Your Return

The Inflation Reduction Act introduced several "adders" or bonus credits that can increase the ITC value beyond the base 30 percent. These bonuses are designed to encourage domestic manufacturing, investment in specific communities, and equitable energy access.

• Domestic content bonus: A 10 percent bonus credit is available if a certain percentage of the project's manufactured components (like steel, iron, and other manufactured products) are produced in the United States. This incentivizes the growth of a domestic clean energy supply chain.
• Energy community bonus: Another 10 percent bonus is available for projects located in "energy communities." These areas include brownfield sites, regions with significant historical employment in fossil fuel industries, or census tracts where a coal mine has closed.
• Low-income community bonus: Projects under 5 megawatts (AC) can receive a 10 or 20 percent bonus credit if they are located in a low-income community or on tribal land, or if they are part of a qualified low-income residential or economic benefit project.

By stacking these bonuses, a project could potentially qualify for a tax credit of up to 50 percent of its total cost, making the financial case for solar even more compelling for your clients.

The Modified Accelerated Cost Recovery System (MACRS)

Businesses can also benefit from the Modified Accelerated Cost Recovery System (MACRS), which allows accelerated depreciation. This depreciation helps a company recoup the cost of the solar panels over time by deducting a portion of their value from its taxable income each year.

While most commercial equipment is depreciated over seven years or more, solar energy systems are eligible for a five-year accelerated depreciation schedule under MACRS. This allows businesses to write off the asset's value more quickly, resulting in larger tax deductions in the early years of the project's life.

How MACRS and Bonus Depreciation Work

The basis for depreciation is the total project cost. If a business claims the ITC, the depreciable basis is reduced by half the value of the ITC. For example, if a project claims a 30 percent ITC, its depreciable basis would be 85 percent of the total project cost (100 percent – [30 percent / 2]).

In addition to the five-year schedule, solar projects are currently eligible for 80 percent bonus depreciation for projects placed in service in 2024. This powerful incentive allows a business to deduct 80 percent of the depreciable basis in the first year alone. The remaining 20 percent is then depreciated over the five-year MACRS schedule.

Direct Pay and Transferability

Two groundbreaking provisions in the Inflation Reduction Act have made it easier for different types of organizations to access these tax benefits.

Direct Pay

For the first time, tax-exempt entities such as non-profits and municipalities can receive a payment from the IRS equal to the value of the tax credit. Before this provision, these organizations could not benefit from tax credits because they had no federal tax liability. Direct pay opens up solar investment to a whole new sector, creating opportunities for projects on schools, hospitals, and public buildings.

Transferability

Transferability allows for-profit businesses to sell their tax credits to another entity in exchange for cash. This is a game-changer for companies that may not have sufficient tax liability to use the full value of the credits.

It creates a more streamlined, efficient market for tax equity, making it easier for developers to finance projects without having to navigate complex partnership structures. This can reduce transaction costs and make financing more accessible for a wider range of projects.

Building a Stronger Business Case

As a large-scale solar company, your ability to clearly utilize the financial benefits of these tax incentives is essential. Frame the conversation around key metrics that resonate with business leaders: return on investment (ROI), payback period, and internal rate of return (IRR).

One of the first steps in applying for these incentives is to ensure your current solar energy system complies with all safety standards, including solar system labels. At Get Solar Labels, we can help you find the best labels for your solar panels to identify and maintain the system's components. Explore our catalog to find the right labels for your business.

Once you ensure safety standards, you can take advantage of the current policy landscape, which offers unprecedented support for commercial solar development. By mastering the details of these tax incentives, you’re empowered to make smart, sustainable investments that benefit their bottom line and the planet.