Federal Solar Tax Credits for US Businesses in 2024

Businesses in Virginia, North Carolina, and beyond can save money with two solar energy tax credits. If you’re a company, nonprofit, or a local or tribal government thinking about solar power, listen up!

First, the Investment Tax Credit (ITC) lets you cut down your federal income tax based on a chunk of your solar system’s cost installed in that tax year. It’s like getting a discount on your tax bill for going solar!

Then there’s the Production Tax Credit (PTC), which rewards you for the electricity your solar setup generates. For the first 10 years, you get a tax break for every kilowatt-hour produced. It’s an ongoing thank you from the government for adding clean energy to the grid.

But here’s the catch: you can’t use both credits for the same solar setup. Think of it like choosing between a one-time discount (ITC) or a long-term savings plan (PTC). And if you’re clever, you might mix and match credits for different parts of your solar project.

For solar systems kicking off in 2022 or later and starting construction before 2033, you’re looking at a 30% ITC or a PTC of 2.75 cents per kilowatt-hour. But there’s a twist – you need to meet certain job standards set by the Treasury or have a system smaller than 1 megawatt.

What projects are eligible for the ITC or PTC?

Now, who gets to join the solar savings club? Your solar system must be:

• In the U.S. or its territories
• Use mostly new equipment
• Can’t be rented out to a tax-exempt group. Schools can still get the ITC, but in a different way.

Which is right for me, the ITC or the PTC?

Deciding between the ITC and PTC? If your project’s big and in a sunny spot, the PTC might be more up your alley. But if you’re in a less sunny area or your project’s costly, the ITC could be better. Smaller projects often benefit more from the ITC, especially with extra credits for serving low-income areas.

What costs count for the ITC?

Think solar panels, inverters, and other essential equipment, plus installation and some other costs. But your new solar roof? Only the extra costs count, like special solar shingles or a roof that helps make more electricity.

So, whether you’re in sunny North Carolina or the diverse climate of Virginia, these tax credits can make solar power more affordable and rewarding.

What expenses are eligible for the ITC?

If you’re putting up a solar system and thinking about the Investment Tax Credit (ITC), here’s something cool: if the main reason for your structure, like a building or a carport, is to generate electricity with solar panels, and any other use is just a small part, you might get the ITC for the whole thing. Even parts of buildings that usually don’t count for the ITC might qualify if they’re specially designed to be part of your solar setup. This means cool solar innovations like windows, shingles, or wall panels that both look good and make power could get you some tax savings.

Now, about the work that goes into building these solar projects in places like Virginia and North Carolina: to get the full ITC or PTC, you’ve got to pay your construction crew the going wage in your area. This rule kicks in for projects that started before the end of January 2023. Plus, you need to have apprentices working a certain percentage of the total construction hours. This percentage goes up over time, starting at 10% for projects that began in 2022 and climbing to 15% for those starting after 2023.

Missed the mark on paying the right expenses? You can fix it by paying your workers the difference, plus interest, and forking over a $5,000 fine per worker. And if you didn’t hire enough apprentices, you can make up for it with a good effort or by paying a penalty, which gets steeper if you intentionally ignored the rules.

On top of the basic credits, there are extra bonuses for using American-made stuff. For the ITC and PTC to give you a bonus, a big chunk of your project needs to be made in the USA, including all the steel or iron and a good portion of other manufactured items. The percentage of American-made materials you need starts at 40% for projects up until 2024, then gradually increases to 55% for projects starting in 2027 and beyond.

The IRS gave some guidelines to help figure out what counts as American-made, listing out things like steel racks for your solar panels or the inverters that change sunlight to electricity. They also clarified how to count the cost of American-made products, focusing on the direct costs like labor and materials without factoring in other expenses like electricity or profit margins.

What are the bonus credits?

Here’s how you work out the American-made part of your project: say your solar setup has two made-in-the-USA products. If all parts of the first product are American, and its total cost is $100, that’s fully counted. But if the second product, costing $200, has some parts from abroad, only the cost of the American parts, say $80, counts. So, if the total cost is $300, and $180 of that is American-made, you’re hitting a 60% American-made mark, which is above the required percentage for most projects right now.

Direct Costs of Manufactured Products 1 and 2

When you’re trying to get that extra boost from the domestic content bonus credit for your solar project, you’ve got to let the IRS know you’re playing by the rules. You need to send them a letter saying your project uses the right amount of American steel, iron, and other made-in-the-USA goods. And you can’t just say it; you need to have the paperwork to prove it. This rule stands until new guidelines come out, which should be within 90 days after they announce they’re working on them, but who knows when that will be.

Energy Community Bonus

Now, if your solar project is helping out an “energy community,” you might be in for even more savings. An energy community could be a place cleaning up from pollution, like old factories or mines, or an area that’s really felt the loss of coal, oil, or gas jobs. It could also be a neighborhood that’s had to say goodbye to a coal power plant. If your project is giving one of these places a new lease on life, you could get an extra 10% off with the ITC or PTC.

Low-Income Bonus

But there’s more. If your project is helping folks in low-income areas, you could get an even bigger break on your taxes. For smaller projects under 5 megawatts, you’re looking at an extra 10% or 20% off with the ITC, depending on where it’s located and who it’s helping. There’s a limit, though, to how much solar power can get this bonus each year, capped at 1.8 gigawatts. The IRS has a system to pick who gets it, and they might roll over any unused cap to the next few years.

For 2023, the IRS has a plan on how to spread out this opportunity, so if you’re thinking about bringing solar power to a community that could really use the boost, now’s a great time to see if you can make it happen and save some money too.

The IRS is setting aside 560 MW just for residential solar projects that fit behind your meter, making it easier for homeowners to get in on the solar action. But, there’s a catch: you’ve got a 60-day window to throw your hat in the ring, and they haven’t even told us when this starts. If you miss that window, don’t sweat it; they’ll keep taking applications until they hit their limit. But if too many people apply, they’re going to draw names out of a hat. They’re also looking out for projects that really make a difference, like ones owned by the community or in just the right spot.

Don’t try to game the system by breaking up your big project into smaller bits to stay under the 5 MW cap; they’re onto that trick. And once you get the green light, you’ve got four years to wrap it up, but you can’t start counting your chickens before the IRS says go. If you need to tweak your project’s size, where it is, who owns it, or how the benefits get shared, you’d better check the rules first.

When do the ITC and PTC phase out?

Now, about the future of these tax breaks like the ITC and PTC: they’re set to start winding down in 2032 unless the folks in Congress decide to keep the party going. If you kick off your project in 2033 or after, you still get the full deal for that year. But by 2034, you’re only getting 75% of the goodies, and by 2035, it’s down to half. Wait too long, and you’ll miss out entirely.

For big projects over 1 MW, if you start 60 days after the Treasury lays down the law on worker pay and you’re not up to snuff, you’re looking at an 80% cut in your credits, including any extra for using stuff made in the USA or helping out energy communities.

How can tax-exempt organizations benefit?

Non-profits and local governments that don’t usually pay taxes can still get a piece of the action through direct payments or passing the credits along to someone who can use them.

Direct Pay

Tax-exempt organizations like non-profits, states, schools, and certain tribal and rural entities can get a cash refund from the IRS for solar projects that start shining after 2022. But, if you’re part of a partnership, that’s a no-go, although some setups like sharing ownership are okay.

To get this cash back, known as direct pay, organizations need to sign up with the IRS before tax time rolls around each year and get a special number for each solar project. The IRS will share more about how to sign up online later in the year, and they’ll have tips for folks without internet access too.

If you’ve got a solar project funded by a grant or a loan that doesn’t need to be paid back, you can still count that money when you’re figuring out your tax credit. But, the cash you get back from the IRS can’t be more than what you actually spent minus the grant money. For example, if School A gets a grant that covers the whole cost of their solar parking lot, they won’t get extra cash from the IRS. But if School B gets a grant for part of their solar gym roof and pays the rest themselves, they can get the full direct pay amount, as long as it doesn’t go over the cost left after the grant.

Starting in 2024, for bigger projects over 1 MW, you need to make sure a good chunk of your solar project is made in the USA to get the full tax credit cash back. If you don’t meet these rules, you might only get back 90% or less of the credit, and by 2026, you might not get any refund for missing the domestic content mark. The IRS will let us know more about when you can skip these rules, like if American-made stuff is too pricey or hard to find.

And if you try to claim more money than you should, the IRS might tack on a 20% penalty. For individuals and businesses that do pay taxes, these solar credits just lower what they owe to Uncle Sam and aren’t paid out in cash, but they can save them for future tax bills if they can’t use them all up in one year.

Transfer of Credit

If you’re a taxpayer who can’t get direct payments for your solar tax credits, there’s another option: selling your credits to someone else who can use them. You can’t just sell off the extra bonus part of the credit; it’s all or nothing. And if you’ve got a lot of credits from one property, you can split them up and sell to different buyers within the same tax year.

But before you start making deals, you’ve got to sign up with the IRS. You need to do this before your tax return is due and get a registration number for each solar project you have. The IRS will roll out an online system for this in 2023, and they’ll have tips for those without internet access. This registration number has to be on both the seller’s and the buyer’s tax returns. If you’re selling to multiple people, they all use the same registration number.

When you sell your credits, the money you get isn’t considered income by the IRS, so you don’t have to pay federal taxes on it. But the person buying the credit can’t deduct the cost of buying it from their taxes. Both the seller and the buyer need to fill out a form that says all the details about the sale, and they both have to submit it with their tax returns.

One thing to keep in mind: you can’t transfer the right to write off the cost of the solar project (depreciation deductions) along with the tax credits. And if someone claims more credits than they should, there’s a 20% penalty. Also, these transferred credits can’t be turned into cash through the direct pay option.

What does “commence construction” mean?

“Commence construction” means you’re either putting real money down – at least 5% of the total project cost – or you’re actually starting to build something important on-site or for your project. And you’ve got to keep the ball rolling towards finishing up, which the IRS figures you’ve done if you wrap up within four years, or ten if you’re building on federal land.

Looking for more ways to save on your solar setup? Check out the Database of State Incentives for Renewables and Efficiency (DSIRE) for the scoop on state and utility rebates. Just remember, most rebates from your utility or state might bump up your taxable income, but they don’t mess with how much you can claim for the ITC. There’s an exception for rebates on residential systems, where the rebate lowers your project’s cost but doesn’t count as income, giving you a smaller ITC but also less tax to worry about.

Are there other incentives for solar purchases? How do they change tax credit calculations?

You could make some cash from selling renewable energy certificates or get a boost from state performance incentives. Some places even offer state tax breaks or won’t hike up your property taxes for adding solar equipment. And if you snag a grant or a loan, especially from a state or a non-profit, that could change things too, especially for tax-exempt groups looking at direct pay options.

ELECTRIC UTILITY AND STATE GOVERNMENT REBATES

Depreciation deductions can also play a big part. You can write off the value of your solar system faster with accelerated and bonus depreciation, which means you pay less tax now rather than later.

Let’s break it down with an example. Say a business kicks off a solar project in 2023, gets it up and running by 2025, and spent a cool million on a 500-kW setup. How do the ITC, bonus depreciation, and accelerated depreciation stack up against the PTC and the same depreciation benefits when we’re talking tax time in 2025?

If you go with the ITC, you’re looking at a direct cut in your tax bill based on the system’s cost. With the PTC, it’s more about how much juice your system is pumping out over time. Adding in depreciation, both options have their perks, but you’ll need to crunch the numbers based on your system’s cost, how much power it’s expected to make, and how you value money over time.

What if you can’t use all your tax credits right away? You’ve got some wiggle room to carry those credits back three years or forward a whopping 22 years to find a time when they can do you the most good. But after that, you might lose half of what’s left, and you can’t just sell those credits to someone else.

Other Incentives

For businesses that aren’t big on taxes, hooking up with a tax equity investor might be the way to go. You can team up and share the tax benefits, with setups like partnership flips or sale-leasebacks making the most of those solar tax perks.

Financing your solar project can get tricky, especially if you’re not personally on the hook for the loan. The IRS might make you wait to claim your ITC until you’ve paid off some of the loan, but there are ways around it.

Accelerated Depreciation

Businesses that go for the solar Investment Tax Credit (ITC) can also take advantage of accelerated depreciation, which means they can write off the cost of their solar setup faster than usual in the early years. This move lowers the upfront financial hit of adding solar by giving businesses a bigger tax break sooner.

Here’s the difference: the ITC directly cuts down the taxes you owe, dollar for dollar. Depreciation, on the other hand, is about lowering the amount of profit you’re taxed on. It’s like saying, “This part of what we made this year isn’t profit; it’s just us getting back what we spent on solar panels.”

When you claim the ITC, you can’t write off the full cost of the solar project right away because the tax credit has already given you a boost. Instead, you write off the project cost minus half the value of the ITC. This amount gets spread out over five years, with a little trick called the half-year convention, which pretends you only had the solar for half the year, no matter when you actually put it in. This lets you write off more of the cost in the first year and less later on.

If you don’t use up all your depreciation deductions in one year, no worries; you can carry them forward to future years, keeping the tax savings going. This accelerated depreciation schedule is a handy tool for businesses to reduce their tax bill early on in the life of their solar investment.

Example Calculations

To see how solar incentives like the Investment Tax Credit (ITC), Production Tax Credit (PTC), bonus depreciation, and accelerated depreciation play out in real life, let’s look at a hypothetical business installing a 500-kW solar system in 2023 and starting to use it in 2025.

ITC Scenario:

• ITC Savings: With a 30% ITC on a $1 million system, the business saves $300,000 right off its tax bill.
• Bonus Depreciation: After the ITC, the system’s depreciable base drops to $850,000 (85% of the original cost). At 40% bonus depreciation, that’s another $340,000 deduction.
• Accelerated Depreciation: Using a 20% depreciation rate for the first year on the remaining balance gives a deduction of $102,000.
• Total Tax Savings for 2025: Combining the ITC and depreciation deductions, and applying a 21% tax rate, leads to a total tax reduction of $392,820.

PTC Scenario:

• PTC Savings: If the system produces 876,000 kWh at a 20% capacity factor, and with a PTC of 2.75 ¢/kWh, the first year’s tax credit is $24,090.
• Bonus Depreciation: Without the ITC reducing the depreciable base, it remains at $1 million. At 40% bonus depreciation, that’s a $400,000 deduction.
• Accelerated Depreciation: With the 20% rate applied to the balance after bonus depreciation, the deduction is $120,000.
• Total Tax Savings for 2025: Adding up the PTC and depreciation deductions, and factoring in the 21% tax rate, the total tax savings is $133,290.

In both scenarios, the business benefits significantly from these incentives, but the choice between ITC and PTC depends on various factors like the system’s production, upfront costs, and how the business prefers to realize savings—immediately or over time.

Ready to Claim Your ITC or PTC?

If you don’t use all your solar tax credits in one year, you’re not out of luck. For projects that light up from 2023 onwards, you can push these unused credits back three years or forward a whopping 22 years. That gives you a lot of flexibility to apply them in years where they can reduce your tax bill. However, after that time, if there are any credits left, you can only deduct half of them, and the rest vanish. Also, remember, you can’t sell these carried-over credits to someone else.

For businesses that don’t owe a ton in taxes, tax equity financing is a smart way to still get the full benefit of these tax perks. They can team up with an investor who’s looking to reduce their own taxes. This partnership can get a bit intricate, but it usually involves either a “partnership flip,” where the roles of who gets the economic benefits change after certain goals are met, or a “sale-leaseback,” where the developer sells the solar setup to an investor and then leases it back.

When it comes to financing your solar project, if you go for a loan where you’re not personally on the hook to pay it back (nonrecourse financing), it can complicate your ITC claims. You might have to wait until you’ve paid off some of the loan before you can claim the full credit. And if you use tax-exempt bonds to fund your project after mid-August 2022, your ITC or PTC might shrink by up to 15%, depending on how much of the project those bonds are covering.

To officially claim your ITC, you’ll need to fill out IRS Form 3468 and attach it to your tax return. For the PTC, the form you need is IRS Form 8962. Both forms come with instructions that guide you through how to fill them out correctly.

Let 8MSolar Help

If you need any additional support in grabbing these awesome commercial tax credits, reach out to the commercial solar experts at 8MSolar and we will guide you through the process. Our goal is to help North Carolina and Virginia achieve full energy sustainability. Let us help you save money and save the environment today!