Since 2006, the federal solar investment tax credit (ITC) has helped thousands of businesses turn free sunlight into clean and affordable energy. The current 30% ITC—which got revamped in 2022—has an updated schedule extending through 2035.
This increased rate and updated schedule will surely impact savings potential for organizations looking to improve their bottom. So, if your company has been considering a solar investment, read on to learn how this lucrative tax credit is worth your attention now, and what you may miss when it's gone.
While there are other incentives that can make your commercial solar project drastically more affordable, the federal ITC is arguably the most well-known and lucrative. It's also currently the most fleeting. That said, there are ways to lock-in the current rate even without a fully completed installation. Curious how? Read on and don't skip #3.
The ITC ramp-down schedule started on January 1st, 2020 when the original 30% rate decreased to 26%. The previous ramp-down schedule had 2020 as the first and only year of the 26% rate, but due to the COVID-19 pandemic, Congress extended the 26% rate through the end of 2022. As part of the Inflation Reduction Act passed in August 2022, the previous 30% rate was reinstated and extended for 10 years through 2032.
If your company has been thinking about making the switch to solar, now is the time to act! With solar's growing popularity, installation schedules are filling up quickly for 2023, with some already being booked out til the middle of the year. Additional government extensions on the tax credit are never promised and shouldn't be relied upon. If your organization wants to reap the benefits of the 30% federal ITC, it's vital to start your solar journey today so your project will be eligible for the entire 30% on your 2023 taxes.
2. How the ITC is Applies & Who Qualifies
With the federal tax credit (ITC), you can deduct 30% of the cost of your solar energy system from your business taxes. This is a dollar-for-dollar credit toward the income taxes that would otherwise go to the federal government. To qualify, the business must have a tax liability upon filing. In other words, if the business owner is going to receive money back from their tax return, then the credit will not be applied for that year and will simply roll forward to the next.
The amount deducted is calculated by multiplying 30% by the "tax basis," which is the amount invested in eligible property. For solar installations, eligible property can include solar panels, installation costs, racking, circuit breakers, energy storage devices, and sales and use tax on the equipment.
3. Qualifying for 30% - No Installation Required
The IRS detailed the requirements a commercial solar energy project must meet in order to qualify for the ITC in a given year. There are two methods that can be used to prove that a commercial solar project qualifies. The first is the Physical Work Test, which must show the commencement of physical work of a significant nature. The second is the Five Percent Safe Harbor Test, which requires that the taxpayer demonstrates that they've paid five percent or more of the total cost of the facility in the year construction begins. Depending on whether your project has met a construction threshold or a payment threshold, you could still claim the 30% tax credit next year even if your project isn't completed in that specific year. Click here to read more about the revised IRS requirements.
There’s never been more help available to those businesses who’d like to start offsetting the rising cost of energy with their own solar power plant. Contact our commercial solar team to find out what’s available for your business.