By ArtIn Energy

May 24 – 2024

Maximize ROI with Federal Solar Tax Credits for Businesses

The ever-increasing cost of traditional energy sources is a growing concern for businesses of all sizes. So, embracing renewable energy solutions like solar power has become a strategic necessity for many. Not only does solar energy offer a clean and sustainable path to reducing your environmental footprint, but it also presents a compelling financial opportunity. Federal solar tax credits provide a substantial financial incentive to make the switch to clean, renewable energy, significantly boosting the return on investment (ROI) for commercial solar projects.

Optimizing financial performance in today’s competitive landscape is crucial for sustainable business growth. We’ve created this comprehensive guide to help businesses understand how US federal solar tax credits can be a game-changer, helping them offset a significant portion of the upfront costs of installing a solar system. Learn how government incentives translate to immediate financial benefits and a faster payback period for the investment. 

Don’t hesitate to let us know if you’d like to know more about the initial investment, specific incentives and solar tax credits your company can apply for, and details about transitioning to sustainability and responsible business practices. Contact us today to schedule a free consultation. 

Types of Commercial Solar Tax Credits

The federal government offers two primary tax credits that significantly incentivize businesses to invest in commercial solar panels: the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). Let’s explore the specifics of each credit and how they can benefit your commercial solar project.

Investment Tax Credit (ITC):

The ITC is a one-time tax credit applied directly to a business’s federal income tax liability. It essentially reduces the upfront cost of installing a solar energy system by allowing businesses to deduct a percentage of the total project cost from their federal taxes.

Currently, the ITC offers a generous 30% tax credit for commercial solar projects placed in service before the end of 2024. This credit gradually decreases in subsequent years, so taking advantage of the current rate can significantly enhance the financial viability of a solar investment.

Basically, the ITC works like a significant down payment on your solar project, directly reducing the taxable income a business reports. Here’s a closer look at its attractiveness:

Immediate Financial Impact: Unlike loans or subsidies, the ITC doesn’t require repayment. It’s a direct tax credit applied in the year a solar system is installed and operational. This translates to a lower tax bill for businesses, freeing up immediate capital that can be reinvested in other areas or used to optimize the bottom line further.

Reduced Payback Period: By lowering the effective cost of solar systems through the tax credit, the ITC helps recover the investment faster. This means your company starts enjoying the long-term cost savings of solar power generation sooner, accelerating the overall commercial solar ROI.

Enhanced Cash Flow: Thanks to the ITC, the reduced upfront cost improves the business’s cash flow situation. This frees up funds for other operational needs or strategic investments while your company simultaneously benefits from the ongoing cost savings generated by solar power production.

Here’s a breakdown of the key features of the ITC:

• Applies to: Upfront costs associated with installing a solar energy system (including equipment, installation, and permitting).
• Credit Percentage: Currently 30% (subject to change in future years).
• Tax Benefit: Reduces federal income tax liability in the year the system is placed in service.
• Claiming the Credit: The ITC is typically claimed on federal tax Form 3468, Investment Tax Credit.

Production Tax Credit (PTC):

The PTC is a performance-based tax credit that incentivizes electricity generation from solar energy systems. Unlike the ITC, the PTC is not a one-time credit. Instead, businesses receive a specific amount of money per kilowatt-hour (kWh) of electricity their solar system produces over a specified period (typically 10 years). This credit is then applied against the business’s federal income tax liability. Let’s explore why it can be attractive:

Hedge Against Rising Electricity Costs: The PTC provides a guaranteed income per kWh of electricity your company’s solar system generates. This acts as a hedge against fluctuating electricity prices. As traditional energy costs rise, the value of the PTC increases, potentially offering even greater long-term benefits.

Predictable Revenue Stream: Knowing the exact credit amount per kWh for a set period (typically 10 years) allows for more predictable budgeting and revenue forecasting, which improves businesses’ financial planning and transparency.

Incentivizes Long-Term Solar Investment: The multi-year nature of the PTC encourages businesses to maintain and operate their solar systems effectively over the long term. This ensures consistent electricity generation and maximizes the overall benefit derived from the solar investment. 

Here’s a breakdown of the key features of the PTC:

• Applies to: Electricity generation from a qualified solar energy system.
• Credit Amount: Varies depending on the year the system is placed in service (currently phased out for most commercial projects).
• Tax Benefit: Reduces federal income tax liability over the designated credit period based on electricity production.
• Claiming the Credit: The PTC is typically claimed on federal tax Form 8835, Renewable Electricity Production Credit.

Comparing ITC and PTC

The Investment Tax Credit (ITC) and Production Tax Credit (PTC) offer distinct benefits for commercial solar projects. Here’s a breakdown to help you understand which credit might be a better fit for your business:

Now we know that the ITC provides a significant upfront boost, and the PTC creates a long-term revenue stream based on electricity production, solidifying the solar investment’s long-term financial viability.

In general, the ITC is the more favorable option for most commercial solar projects. This is because the ITC provides a substantial upfront tax benefit that can significantly reduce the investment’s payback period. The PTC, while still offering some incentive, is typically less attractive due to its reliance on ongoing electricity production for credit generation. 

Overall, the ITC and PTC significantly reduce the financial barriers to investing in solar energy solutions. This makes solar power a more compelling investment, allowing businesses to transition to clean energy while simultaneously enhancing their financial well-being. However, your project’s specific circumstances and tax situation will determine the most beneficial credit. Our tax advisor can help you choose the best approach for your specific needs.

ITC vs. PTC: Which is Right for Your Business?

While both the Investment Tax Credit (ITC) and Production Tax Credit (PTC) are great incentives for businesses to go solar, their strengths can be more or less beneficial in different scenarios. 

By understanding the details of the ITC and PTC, businesses can make informed decisions about which credit best suits their project and leverage these valuable incentives to make solar power a more attractive and financially rewarding investment. Let’s see how: 

Considering Company Size and Project Scope

Small to Mid-Sized Businesses: The ITC is generally the best option for smaller and mid-sized businesses. Its upfront cost reduction translates to a more immediate financial benefit, which can be crucial for businesses with tighter budgets. The faster payback period of the ITC also makes it attractive for smaller projects with potentially lower overall electricity generation.

Large Businesses with Extensive Solar Projects: The long-term benefits of the PTC might be more relevant for large-scale solar installations. The ongoing revenue stream generated by the PTC over a 10-year period can be substantial for projects with high electricity production capacity. However, large businesses should still consider the immediate financial boost of the ITC and potentially leverage both credits if their tax situation allows.

Tax Liability as a Factor:

Companies with High Tax Liability: Businesses with a significant federal income tax burden can fully use the ITC benefit, maximizing its cost-saving potential. The immediate reduction in tax liability frees up capital that can be reinvested in other business areas.

Companies with Low Tax Liability: If a business consistently has low tax liability, the PTC might be a more strategic choice. Even with lower electricity production, the PTC can still offer some tax benefits over the extended credit period.

Risk Tolerance and Project Certainty:

Risk-Averse Businesses: The ITC provides a guaranteed upfront financial benefit, regardless of future electricity production. This makes it a safer choice for businesses with a lower risk tolerance.

Businesses with Predictable Electricity Needs: The PTC can be a valuable tool for companies with a clear understanding of their future electricity consumption. The long-term tax benefits associated with the PTC can be maximized by accurately projecting electricity generation.

Beyond Size and Tax Liability:

There are some additional points to keep in mind:

• Project Goals: Is your company primarily interested in short-term cost savings or long-term energy independence? The ITC aligns better with short-term goals, while the PTC offers long-term financial benefits.
• Future Electricity Prices: If you anticipate rising electricity costs, the PTC becomes even more attractive as the credit’s value increases with each kWh produced.
• Project Timeline and Budget: The ITC’s one-time credit fits well within a defined project budget, while the PTC requires long-term planning to maximize its benefits.

Eligible Expenses and Requirements

The ITC and PTC offer tax benefits based on a broad range of expenses associated with the commercial solar project. It is important to make sure the project and expenses meet the latest IRS eligibility requirements for the ITC and PTC. Tax regulations can change, and specific details regarding eligible expenses might be subject to adjustments. These are some typical eligible expenses:

• Solar Panels: The primary component of the solar energy system.
  
  
• Inverters: Convert the direct current (DC) electricity the solar panels generate into usable alternating current (AC) electricity for the company.
  
  
• Mounting Equipment (Racking System): Provides secure support and structure for the solar panels on the roof or designated location.
  
  
• Storage Device: Storages the energy generated by panels.
  
  
• Balance-of-System (BOS) Equipment: Includes all the additional components necessary for a functional solar system, such as wiring, monitoring systems, safety equipment, and permits.
  
  
• Permitting, Installation, and Inspection Fees: Costs associated with obtaining the necessary permits, installation, and inspections for the solar project.
  
  
• Engineering and Design Fees: Expenses incurred for professional engineering and design services related to the system.

Requirements for Claiming the ITC and PTC

While both credits incentivize solar power adoption, a project must meet specific requirements to qualify. These can include system size, location, and ownership structure. Here’s an overview of typical requisites:

• Project Ownership: The business must own the solar energy system. Lease arrangements or power purchase agreements (PPAs) generally don’t qualify.
  
  
• Project Location: The solar system must be located within The United States and its territories.
  
  
• System Size: Depending on the specific credit, minimum or maximum size requirements might exist.
  
  
• Project Start Date: The project must be placed in service before the designated deadline to qualify for the current credit percentages (ITC and PTC are subject to change over time).
  
  
• Tax Filing Requirements: The business must be a taxpayer with sufficient federal income tax liability to utilize the tax credits. Businesses with very low tax liability might not see the full advantage of these credits.

As mentioned above, tax laws and incentive programs can change over time. Staying up-to-date on the latest regulations is crucial for maximizing the financial benefit of these tax credits.

Can You Claim Both ITC and PTC?

In most cases, businesses cannot claim both the ITC and PTC for the same solar energy system. The two credits are similar incentives, claiming both would provide an excessive financial benefit.

However, there are a few exceptions to consider:

Co-Located Systems: If your business installs combined solar panels and battery storage systems, it might be eligible for the ITC for the solar panels and a separate tax credit for the battery storage component (depending on current regulations). It is important to consult with your tax advisor to explore this possibility.

Phased Project Completion: If a large-scale solar project is constructed in phases and placed in service over multiple years, it might be able to claim the PTC for the earlier phases while claiming the ITC for the later phases (subject to specific IRS guidance). 

Focus on the Credit That Best Suits Your Needs

Given the limitations and complexities of claiming both credits, it’s usually best to focus on the tax credit that best aligns with your business goals and financial situation.

• Prioritize Upfront Cost Savings: Choose the ITC for a significant upfront tax reduction and a faster payback period.
• Value Long-Term Revenue Stream: For large-scale projects with high electricity production potential, consider the PTC, which guarantees an income per kWh generated over a 10-year period.

Our qualified tax experts can analyze your specific situation and advise you on the most strategic approach to maximizing your business’s financial benefits from solar power.

Impact of the Inflation Reduction Act (IRA) on Solar ITC and PTC

The Inflation Reduction Act (IRA), signed into law in August 2022, is a landmark piece of legislation aimed at addressing several key issues in the United States and especially influenced the ITC. The act brought significant positive changes for businesses considering solar power. Some of the issues covered by the IRA are:

Combating Climate Change: The IRA prioritizes investments in clean energy technologies and infrastructure, aiming to reduce reliance on fossil fuels and greenhouse gas emissions significantly.

Lowering Energy Costs: The act includes provisions designed to promote energy efficiency and incentivize renewable energy adoption, potentially leading to long-term cost savings for consumers and businesses.

Inflation Reduction: While the long-term impact on inflation is still being debated, the IRA includes measures to address supply chain issues and potentially stabilize energy prices.

The IRA is a significant step forward in promoting clean energy and sustainability in the United States. 

Impact on ITC

Extended Eligibility: The IRA crucially extended the availability of the 30% ITC for commercial solar projects placed in service through the end of 2024. Previously, the credit was scheduled to decrease significantly in later years.

Phased Reduction: After 2024, the ITC begins a gradual decrease, providing some continued incentive for businesses to invest in solar even after the peak benefit period.

The IRA’s impact on the ITC is highly beneficial for businesses. The extension and enhancement of the credit create a more attractive financial environment for companies to invest in solar energy and start sustainable business practices. 

Impact on PTC

Limited Relevance for Most Businesses: The IRA didn’t make greater changes to the PTC, making it primarily relevant for large-scale or specific project types. 

The Inflation Reduction Act has significantly enhanced the financial attractiveness of solar power for businesses. Don’t miss out on these valuable incentives! Contact us for a free consultation and start your transition to sustainability. Our team of experts can help you navigate the complexities of the IRA and determine how it can benefit your specific project. We’ll also guide you through all available tax credits, rebates, and deductions to maximize your savings and accelerate your return on investment.

Bonus Credits and Additional Incentives

The Investment Tax Credit (ITC) is the primary federal tax credit for commercial solar projects, followed by the Production Tax Credit (PTC), but there are additional programs and incentives that can improve the financial benefits of investing in solar energy. 

Bonus Credits

Bonus credits are important tax incentives offered in addition to the ITC for commercial solar projects. They are designed to encourage businesses to invest in solar power and accelerate the adoption of clean energy.

Domestic Content Bonus

The Inflation Reduction Act (IRA) introduced a Domestic Content Bonus Credit that incentivizes the use of American-made materials in solar projects. This credit provides an additional percentage (currently 10%) on top of the base ITC for projects that use solar panels and inverters manufactured in the United States.

The Domestic Content Bonus further reduces upfront costs and shortens the payback period. Additionally, it supports domestic manufacturing and strengthens the U.S. clean 

energy supply chain.

Energy Community Bonus

The IRA offers this extra benefit for projects located in designated energy communities. As defined by the IRA statute, these communities are typically those that have faced economic problems due to the decline of the fossil fuel industry. The US Department of Energy has created a handy mapping tool to help identify these areas.

The program offers an additional 10% to the ITC. Larger projects that don’t meet specific labor standards only receive a bonus of 2%. This makes sense because the aim of the energy community bonus is to revitalize these areas. By requiring high labor standards, the program ensures that these projects contribute to better wages and working conditions, ultimately benefiting local communities. 

Low-Income Bonus

The Low-Income Solar Tax Credit provides an additional 10% ITC for solar projects under 5MW located in low-income communities. This can be particularly relevant for community solar projects or projects that serve low-income housing developments.

This bonus helps expand access to clean energy and associated cost savings to low-income communities, fostering a more equitable energy landscape. 

Electric Utility and State Government Rebates

Beyond federal tax credits, additional financial incentives are available to enhance commercial solar projects’ cost-effectiveness. These are the two key programs: 

Electric Utility Rebates

Many solar service providers offer rebate programs to encourage customers to switch to solar energy by lowering the initial cost, which fastens the return on investment. These programs typically provide a one-time cash payment based on specific factors like:

• System size: Larger systems with higher electricity generation capacity generally qualify for larger rebates.
• Project location: Utilities might offer higher rebates in specific areas to promote solar adoption in underserved regions.
• Technology used: Incentives might be higher for advanced solar technologies or combining different solutions, such as battery storage systems integrated with solar panels.

Eligibility for utility rebates can vary depending on your business location and specific utility provider. The requirements typically include owning the property where the solar panels will be installed and meeting a minimum or maximum system size. 

State Government Rebates

Many state governments offer their own solar rebate programs. State government rebates, combined with federal tax credits and utility rebates, create a powerful incentive stack, making solar power a highly attractive financial proposition for your business. These programs can take different approaches, including:

• One-time Cash Payment: Similar to utility rebates, these programs offer a fixed upfront payment to lower the cost of solar installations.
• Performance-Based Incentive (PBI): These programs reward solar energy production. The more electricity a system generates, the larger the rebate it’s received.
• State Tax Credit: Some states offer a tax credit applied to the state income tax liability, similar to the federal ITC but specific to your state tax obligations.

Each state has its own rebate programs, so it’s crucial to research the specific offerings in your state. You can start by visiting the website of your state’s energy office or Department of Environmental Protection. Look for sections on “renewable energy” or “solar incentives.” It is possible that state government websites also have searchable databases of incentive programs.

Depreciation & Deduction Incentives 

Depreciation and deduction incentives allow businesses to recover the cost of their solar energy system over time through tax deductions. Let’s explore two key strategies:

Accelerated & Bonus Depreciation (MACRS)

The Modified Accelerated Cost Recovery System (MACRS) is a system established by the IRS that allows businesses to deduct a significant portion of the cost of qualifying property, including solar energy systems, in the year it is placed in service and over the following years.

Accelerated depreciation provides valuable tax benefits by allowing companies to deduct a larger portion of their solar system’s cost in the earlier years. This reduces taxable income and potentially lowers current tax liability.

MACRS assigns different recovery periods to different types of property. For commercial solar panels, the current recovery period is typically 20 years. This means a business can spread the depreciation deduction for its solar system over two decades.

Section 179 Deduction 

Section 179 of the Internal Revenue Code allows businesses to deduct a fixed dollar amount of the cost of qualifying equipment in the year it is placed in service. This can be a significant upfront tax advantage for smaller solar projects.

To qualify for the Section 179 deduction, the solar energy system must be used for business purposes, and the business must meet certain requirements regarding taxable income and purchase amount thresholds.

The maximum deduction amount allowed under Section 179 is subject to change annually. During our consultation, our tax professionals can determine the current limit to ensure your project qualifies.

Choosing Between MACRS and Section 179

The best option for your business depends on several factors, including:

• Project size: The upfront deduction allowed by Section 179 might be more advantageous for smaller solar projects.
• Tax liability: Maximizing the depreciation deduction through MACRS could be more beneficial if your business has a high current tax liability.
• Long-Term vs. Short-Term Benefits: While Section 179 offers a larger upfront deduction, MACRS provides tax benefits over a longer period.

Partnering with ArtIn Energy for Your Solar Needs

With the combination of powerful federal tax credits, attractive state and local incentives, and depreciation and deduction benefits, there’s never been a better time to invest in solar power for your business. The financial advantages are undeniable, and solar energy represents a sustainable choice for your company’s future and the environment.

At Artin Energy, we’re your trusted partner for all your solar needs. We’re a full-service solar solutions provider, and our team of experts will guide you through every step of your solar energy transition. This includes a comprehensive analysis of your energy consumption, custom system design to meet your specific needs, and product installation by our experienced professionals.

We understand the complexities of navigating the different tax incentives associated with solar power. That’s why we offer in-depth tax consultations as part of our comprehensive service. Our team will work closely with you to maximize the financial benefits available for your project.

Choosing Artin Energy means choosing a partner committed to your success. Our solar solutions are designed to deliver a high return on investment (ROI), and we have a proven track record of helping businesses achieve an impressive 32% IRR on solar investments.

Contact us today, and let us show you how solar power can transform your business, reduce your operating costs, and take you to a more sustainable future.