For companies considering solar, deciding to move forward in the near term will provide the optimal return on investment. In addition to locking in long-term energy cost savings and competitive installation costs, the stars have aligned to take advantage of federal, state and local financial incentives. In particular, a short window of time currently exists to maximize the federal tax credits, which are scheduled to be reduced at the end of 2022.
Economic Shifts Created Affordable Solar
The financial landscape for solar has changed drastically in recent years. In the late 1990s and early 2000s, businesses evaluating solar often had difficulty justifying the financial investment due to insufficient payback periods, which were oftentimes between ten and twenty years. The sustainability benefits were a powerful motivator, but financial ROI requirements put PV technology out of reach for many commercial and industrial markets.
Fast forward to today, and the financial returns for businesses going solar are now quite attractive. Costs have come down significantly while legacy incentive programs still exist, leading to simple paybacks that are often less than seven years, and in some cases less than five years. This fact, coupled with reliable systems that produce cheap, green energy for more than 30 years, makes now the ideal time to invest in solar.
A perfect storm of events has led to solar’s affordability. Initially, solar adoption was stimulated by significant government incentives in countries like Germany. A huge wave of international demand led to major investments in manufacturing economies of scale, which has lowered system component costs for everyone. Today in the United States, legacy incentives are paired with low system costs to offer the best return on investment scenario in history.
Businesses thinking about solar today need to understand these financial incentives, how they are changing, and why it is important to act now to reap the largest financial gains.
If your business is ready to take a closer look at solar, SunPeak provides customized a no-cost, no-obligation Solar Feasibility & Financial Analysis that includes project costs, available incentives and lifetime system production and sustainability metrics.
Federal Tax Credits for Solar Maximized Through 2022
The federal Investment Tax Credit (ITC) is a universal and important incentive for solar customers. Unlike a tax deduction, which only reduces a company’s taxable income, the ITC gives any business with tax liability a federal tax credit on its solar investment. Currently, the ITC rate is twenty-six (26%) percent. This means that a business making an investment of $100,000 in solar would offset its federal tax bill by $26,000 in the first year alone.
Congress passed an important two-year extension of the ITC at the end of 2020, allowing businesses to receive full ITC benefits on solar projects that enter construction before the end of 2022. Immediacy is key, as an aggressive step-down schedule will decrease the ITC to 22% for projects starting construction in 2023. Commercial projects started in 2024 or after will only qualify for a 10% tax credit:
“The ITC has proven to be one of the most important federal policy mechanisms to incentivize clean energy in the United States. Corporate solar adoption has surged over the past several years, with more than half of all capacity installed since 2016. 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 Increases Solar ROI
In addition to the ITC, another tax policy aiding commercial solar owners is the favorable depreciation treatment afforded solar systems at the federal level. The entire investment can be depreciated in the same year as project completion, sometimes referred to as “bonus depreciation.” This level of tax shelter is in addition to the tax credit mentioned above.
The IRS reduces the basis for depreciation by half of the applicable tax credit amount. By way of example, if the tax credit is 26% (as it is in 2022), and the ITC is claimed, then the depreciable basis would be 87% of the total cost (100% - (26% X ½) = 87%).
Revisiting the previous example of a solar system constructed in 2022 with a pre-ITC project cost of $100,000, the depreciable basis would equal $87,000. Assuming an average federal tax rate of 21% and an average state tax rate of 7%, total depreciation between federal and state tax returns would equal $24,360. Combined with the ITC savings of $26,000, the total cost for the solar system is often reduced by more than half due to total tax shelter from ITC and federal and state savings from bonus depreciation.
Local Incentives Can Further Drive Savings
Many commercial solar customers can also offset a portion 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 grant opportunities available in their area and apply for available incentives at no additional charge. Our team researches programs offered, drafts grant proposals, completes all necessary applications, and coordinates all paperwork and submission requirements on the customer’s behalf.
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 free*. The significant federal, state and local financial incentives available in 2022 results in systems being paid off sooner than ever. The time to go solar truly is now.
* A modest budget is typically included for expected operations and maintenance.
Request a free analysis to find out if solar is right for your facility.
- The greatest benefits of the federal Investment Tax Credit are diminishing soon. Businesses considering an investment in solar need to take action to reap the largest financial benefit.
- Partnering with an experienced solar provider is essential to gain locally-provided grants and other sources of state-specific funding.