For organizations considering solar, deciding to move forward in the near term provides an optimal return on investment. In addition to locking in long-term energy cost savings and competitive equipment pricing, organizations can further speed ROI by taking advantage of robust federal and local financial incentives.
Some legacy solar incentives have recently changed at the federal level. Here we provide an up-to-date overview of the major financial incentives available for a commercial solar installation in 2023. Organizations that can utilize some or all of these incentives will reap the largest financial gains from their investment.
Inflation Reduction Act Expands Federal Tax Credits for Solar
Though a federal tax credit for solar called the Investment Tax Credit (ITC) has existed for a number of years, the passage of the Inflation Reduction Act in 2022 fortified and expanded federal solar tax credit benefits for businesses and non-profit organizations.
There now exist two options for federal tax credits for solar installations:
- Investment Tax Credit (ITC): The ITC provides solar customers a front-loaded, dollar-for-dollar tax credit equal to 30%1 of the total project cost in the year the system is commissioned. The ITC will remain at 30% until at least 2032. This means that a business making an investment of $100,000 in solar would offset its federal tax bill by $30,000 in the system’s first year of operation.
- Production Tax Credit (PTC): Some projects, especially large commercial or utility-scale systems, may opt to take advantage of the Production Tax Credit instead. The PTC value is based on the amount of renewable electricity produced by your system and is paid annually for the first 10 years of the system’s life. For projects under 1 MWac, the PTC is valued at $0.027/kilowatt hour (kWh), and for projects over 1 MWac that meet the prevailing wage requirement, the PTC is $0.021/kWh. This rate will flex in the future, indexed to inflation.
Other exciting tax credit provisions for solar are included in the Inflation Reduction Act. A few highlights include:
- Tax credit benefits for battery storage.
- Direct pay benefits for non-profit, government, and tribal entities. This allows certain organizations to opt for a cash payment of 30% of the project cost.
- Bonus tax credits are available for certain project sites (low-income or energy communities) and when domestically-sourced equipment is used.
- Transferability of tax credits. If desired, organizations can now transfer or sell tax credit benefits to other parties.
- Based on your project and site characteristics, your solar contractor can offer greater detail on the different tax credit options and adders that may exist for your project.
Based on your project and site characteristics, your solar contractor can offer greater detail on the different tax credit options and adders that may exist for your project.
“The Inflation Reduction Act (IRA) is the most transformational clean energy policy in history. Companies turn to solar for many reasons: to power their operations, to meet environmental goals or simply to save money. No matter the reason, going solar is simply a smart business decision.”
- Solar Energy Industries Association (SEIA)
Accelerated Depreciation Further Increases Solar ROI
In addition to tax credits, commercial solar owners with tax appetite can benefit from tax deductions, including accelerated and bonus depreciation.
- The Modified Accelerated Cost Recovery System (MACRS), allows solar PV system costs to be recovered for tax purposes over a five year period through annual deductions.
- Bonus depreciation further accelerates depreciation by allowing businesses to write off a large percentage of the system’s cost in the first year it is operational. Note that bonus depreciation is scheduled to phase out gradually through 2027.
Per IRS guidelines, the basis for depreciation is reduced by half of the applicable tax credit amount. Therefore, if an ITC of 30% is claimed, then the depreciable basis of the system would be 85% of the total cost (100% - (30% x ½) = 85%). For a solar system constructed in 2023 with a pre-ITC project cost of $100,000, the depreciable basis would equal $85,000.
TABLE 1: BONUS DEPRECIATION INPUTS
|Year System is Commissioned||Percentage of Eligible Asset Value Qualifying for Bonus Depreciation|
TABLE 2: ACCELERATED DEPRECIATION INPUTS2
|Year||Percentage of Eligible Asset Value Qualifying for Bonus Depreciation|
Using the reference tables above, the net federal tax benefit for a $100,000 solar system commissioned in 2023 that claims the ITC would be calculated as follows:
- Bonus Depreciation Calculation
$85,000 (Depreciable Tax Basis) x .80 = $68,000
- Accelerated Depreciation Calculation
Find the difference between the original depreciable basis and amount claimed for the bonus depreciation, and multiply by the depreciation rate:
($85,000 - $68,000) x 0.20 = $3,400
- Total Impact on Tax Liability in Year One
Adding together the bonus and accelerated depreciation amounts and assuming a federal corporate tax rate of 21%, the net impact of depreciation deductions:
($68,000 + $3,400) x .21 = $14,994
The total reduced tax liability for 2023, including the ITC and depreciation deductions:
$30,000 + $14,994 = $44,994
Thus, the total cost of the solar system is reduced by nearly half due to tax benefits in the first year alone. The business would continue to claim accelerated depreciation deductions for tax years 2024-2028 according to Table 2.
Local Incentives Can Also Provide Savings on Solar
Many commercial solar customers can offset even more of their solar project costs with locally-available financial incentives. These monetary awards are often made available by states, utilities, and utility-funded groups to encourage clean energy adoption. Some programs provide incentives as soon as the solar PV system is commissioned. Others are production based and awarded over time as energy is produced from the system. Incentives vary widely by location, but some SunPeak customers have received local incentives exceeding 25% of their overall project costs.
SunPeak helps customers identify and apply for grant opportunities available in their area as an included service.
Going Solar Results in Significant and Lasting Cost Savings
Arguably the greatest financial motivation for businesses to invest in solar is the long-term cost savings realized over the life of the system. Once a solar PV system is paid off, the electricity generated is nearly free3. The significant federal, state and local financial incentives now available help organizations recoup their solar investment quickly. The time to go solar truly is now.
- Substantial federal tax credits and deductions, along with other available financial incentives for solar help businesses and organizations significantly reduce their investment cost in renewable energy.
- An experienced solar provider can help you navigate and gain locally-provided grants and other funding resources.
- The Inflation Reduction Act requires some projects to adhere to new prevailing wage and apprenticeship requirements to receive the full value of the tax credit. Compliance falls largely to your solar contractor, and they should provide detailed information to you on how the provision will be met if your project is affected.
- From IRS Publication 946 Table A-1; assumes a five-year recovery period, a half-year convention, and a 200% declining balance method.
- A modest budget is typically included for expected operations and maintenance.