Businesses and nonprofits that purchase solar energy systems may qualify for tax credits, but the eligibility requirements are complicated. By consulting Cody Ravalli, CPA, you can learn more about these federal solar panel tax credits and determine whether you qualify. This guide is designed to answer your questions about solar panel investment tax credits.
What federal solar panel tax credits are available for businesses?
Two tax credits are available for businesses and nonprofits that purchase solar photovoltaic (PV) systems:
- The investment tax credit (ITC) reduces the federal income tax liability for a percentage of the cost of a solar system installed during the tax year.
- The production tax credit (PTC) is a per kilowatt-hour (kWh) tax credit for electricity generated by Solar PV Systems for the first 10 years of operation. The PTC reduces the federal income tax liability and is adjusted annually for inflation.
Notably, project owners cannot claim both the ITC and the PTC for the same property.
What projects are eligible for the ITC or PTC?
To be eligible for the business ITC or PTC, the solar system must:
- Be located in the United States or U.S. territory
- Use new equipment and limited used equipment (property fails to qualify as solar energy property if used equipment comprises more than 20 percent of the total cost)
- Not be leased to a tax-exempt entity (e.g. a school)*
*Tax-exempt entities are eligible for the ITC in the form of direct payments.
What expenses are eligible for the ITC?
The ITC is calculated based on the cost of building the system and includes the following expenses:
- Solar PV panels
- Balance-of-system equipment
- CSP equipment to generate electricity or heat or cool a structure
- Installation costs
- Other equipment (e.g. transformers, circuit breakers, surge arrestors, and certain energy storage devices)
- Sales and use taxes on the equipment
The cost of a roof installation is generally not eligible; however, the costs of solar shingles, solar tiles, or the incremental cost of installing a reflective roof membrane that increases electricity generation may qualify for the tax credit.
What are the labor requirements for projects?
To qualify for the full ITC or PTC, projects started before January 31, 2023 must satisfy the Treasury Department’s labor requirements. All wages for construction, alteration, and repair (for the first 5 years of the project for the ITC and the first 10 for the PTC) must be the prevailing wage rate. Also, a percentage of the total construction labor hours must be performed by an apprentice:
- 10 percent for projects beginning construction in 2022
- 12.5 percent for projects beginning construction in 2023
- 15 percent for projects beginning construction after 2023
What are the bonus credits?
The ITC and the PTC offer additional credits in addition to credits based on labor requirements. For instance, the Domestic Content Bonus Credit offers a 10 percent increase for a PTC, and an increase of as much as 10 percentage points (which could be as much as a 33 percent increase in the ITC amount) for the ITC in the case of projects for which wage and apprenticeship requirements are met or which are otherwise exempt from such on the investing side.
Does a Home Office Qualify for the ITC?
A home office may qualify for the ITC, but claiming the tax credit can be complicated. When the expenses incurred for a solar PV system are primarily for residential use rather than business purposes, individuals can claim the residential credit.
However, if less than 80% of the cost of the solar PV system is attributed to residential expenses, only the proportionate amount that pertains to residential spending can be utilized to calculate the federal solar tax credit on the individual’s tax return. The portion of expenses categorized as business-related may qualify for a similar commercial ITC on the business’s tax return.
Is the ITC or the PTC right for my business?
Whether to choose the ITC or the PTC depends on factors such as:
- The cost of the project
- The amount of sunlight available
- Whether the project is eligible for any bonus tax credits.
Notably, the ITC is an upfront credit not based on system performance. The PTC may provide a more attractive cash flow because the tax credits are earned over time. An experienced certified public accountant can crunch the numbers and determine which credit provides greater value for your business.
Are there other incentives for solar purchases?
Other incentives are available for businesses that purchase Solar PV systems, including:
- Utility and state government rebates
- Revenue from the sale of renewable energy certificates
- State and local income tax credits
- State and local property tax exemptions on the equipment
- Taxable state or nonprofit grants
- Loan guarantees
- Depreciation deductions
ITC and PTC with bonus depreciation
The following chart summarizes the tax benefits associated with choosing either the ITC and depreciation or the PTC and depreciation for a utility-scale PV system.
Source: U.S. Department of Energy
When do the ITC and PTC phase out?
Generally, ITC, PTC, and associated bonuses begin to phase out for projects that commence construction in 2032. Projects entering construction in 2033, 2034, and 2035 qualify for a reduced percentage of their total value. Projects entering construction after 2035 are ineligible for the ITC and PTC.
What are the benefits of solar energy for businesses?
In addition to federal solar tax credits, businesses can benefit from:
- Lower and predictable utility costs
- Reliable equipment with low maintenance costs
- Increased property value
In short, solar energy can improve profitability, and that’s the bottom line.
Talk To An Federal Solar Tax Credit Expert Today
If you have questions about federal solar tax credits for your business or need assistance filing for the investment tax credit, contact Cody Ravalli, CPA today. Cody provides comprehensive tax and accounting services to businesses across multiple industries in New York and around the country. Call for a 10-15 minute free consultation.