FEDERAL TAX CREDIT
Solar power systems will always pay for themselves over time. But incentives can make your investment in solar pay for itself much faster! The most commonly available incentive is the 30% federal tax credit. Whether you are a homeowner, business owner, or even a non-profit organization or government entity, you’ll be happy to know that there is a version of this credit for you. This incentive effectively reimburses a solar customer for 30% of the total cost of installing a solar power system, battery, or a combination of both. That means it applies to the entire system, including installation, batteries, and labor costs.
As of 2023, the program offers a 30% tax credit to nearly anyone who installs a solar energy system. The credit is known as the Investment Tax Credit (ITC) for businesses, and for residences, it is known as the Residential Renewable Energy Tax Credit. A change in 2023 now allows even non-taxable entities to claim the incentive, where they receive a direct-pay rebate instead of a tax credit. The tax forms are located at IRS.gov or they're available, along with other useful information, at these links: Residential - Renewable Energy Tax Credit | Commercial and all others - Investment Tax Credit.
WHEN CAN I CLAIM THE TAX CREDIT
A homeowner claiming the tax credit must claim it for the tax year in which a system was installed. If the credit reduces your tax liability all the way to zero, the remainder of the credit can be carried forward to subsequent years. The rest of this blog refers to non-residential benefits only.
With commercial entities, if 5% of the job is paid for in a particular tax year, the “Safe Harbour” clause allows the business to begin claiming the credit, even if the project is not completed, as long as continual progress is being made toward completion of the project. Continual progress is not limited to on-site physical construction but can also refer to engineering, permitting, and procurement, which may take quite some time on larger projects. The credit is available for systems installed through December 31, 2032, so business owners have plenty of time to take advantage of this incentive. Of course, the sooner solar is installed, the sooner it pays for itself, though!
Systems over 1MW-AC are subject to specific labor requirements in order for the system owner to be eligible for the full federal incentives. The IRS requires contractors of these large-scale solar systems to pay prevailing wages and maintain industry-standard apprentice-to-journeyworker ratios. As of Q4 2023, the IRS is still determining how to enforce this part of the new law that was introduced as part of the 2022 Inflation Reduction Act (IRA).
If your business does not have the tax appetite to use the entire tax credit in one year, you can carry forward the credit until it's entirely used, or for 5 years, whichever comes first. The IRA also now allows eligible business taxpayers to transfer all or a portion of their eligible tax credits to an unrelated taxpayer.
BONUS CREDIT CONSIDERATIONS FOR COMMERCIAL PROJECTS
A Domestic Content Bonus of an additional 10% tax credit is available for certain qualifying projects. To qualify, the project must meet the following conditions: First, 100% of any steel or iron that is a component of the facility must have been produced in the U.S. Second, 40% of the manufactured products used to build the solar facility must have been produced in the U.S.
Also for non-residential solar power systems, if the system is located within an "energy community" they can receive the Energy Community Bonus which is an additional 10% or 20% tax credit. To qualify, a facility must be located at one of the following: (i) a brownfield site, (ii) a metropolitan or non-metropolitan statistical area which (A) has (or, at any time during the period beginning after December 31, 2009, had) 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas, or (B) has an unemployment rate above the national average for the previous year, or (iii) a census tract or a census tract that is adjoining a census tract in which a coal mine has closed after 1999 or a coal-fired electric generating unit was retired after 2009. The 20% credit is available for community benefit projects and projects in areas with low-income affordable housing schemes.
Read our additional blog post about other incentives that are available for commercial, industrial, non-profit, and government entities.
Disclaimer: This information is not intended to be advice. All of the incentives listed have specific eligibility requirements. Consult your tax advisor to verify eligibility.