Solar energy has the potential to revolutionize the agricultural industry. By harnessing the power of the sun, farmers can reduce their energy costs, increase their sustainability, and improve their overall profitability. However, the initial investment in solar technology can be significant.
That’s where financial assistance and incentives like solar tax credits come into play. These credits can provide substantial financial relief for farmers, making solar energy a more accessible and attractive option.
The USDA has been a strong supporter of renewable energy in rural areas, offering programs like the Rural Energy for America Program (REAP) to help farmers and rural small businesses adopt solar technology.
If you’re a farmer considering solar energy, it’s essential to understand the various solar tax credits available to farmers. This guide will provide you with valuable information on eligibility, benefits, and how to apply. Contact us to learn more about solar tax credits that apply to your case and how our renewable energy solutions can help you maximize your solar IRR and financial savings.
Key Takeaways
- Multiple tax credits and programs are available: Farmers can benefit from various financial incentives, including the ITC, PTC, REAP, and MACRS.
- Eligibility criteria vary: Each tax credit and program has specific eligibility requirements, such as farm income, business location, and project type.
- The Inflation Reduction Act provides significant support: The IRA offers substantial financial incentives for solar energy adoption in rural areas, including bonus credits for domestic content and energy communities.
- ArtIn Energy can provide expert guidance: Our team can assist farmers in navigating the complexities of solar tax credits and programs, ensuring they maximize their financial benefits.
Eligibility Requirements for Solar Tax Credits
| Program | Eligibility Requirements | Key Details |
| IRA: Investment Tax Credit (ITC) | The ITC is available for investments in solar energy systems made after 2021. The credit amount varies based on the size of the solar system and any other qualifying energy property.
Agricultural producers and rural small businesses. Must install solar energy systems or other eligible renewable energy projects. |
Provides a 30% tax credit on installation costs.
Applicable for projects started between 2022 and 2032. |
| IRA: Production Tax Credit (PTC) | Large-scale solar projects that generate substantial electricity.
Must be a qualified renewable energy facility (solar, wind, etc.). |
Offers a $0.0275 per kilowatt-hour (kWh) credit for electricity generated for the first 10 years of the project. |
| USDA REAP: Grants and Loans | Agricultural producers must earn at least 50% of their gross income from agricultural operations.
Small businesses located in rural areas with populations of 50,000 or less. |
Projects must involve renewable energy systems or energy efficiency improvements.
Grants cover up to 50% of eligible project costs. Loans guarantee up to 75% of eligible project costs. |
| Modified Accelerated Cost Recovery System (MACRS) | The business must own the solar property.
The solar property must be tangible, used for business or income-producing purposes, and have a determinable useful life. The system must be ready and available for use during the tax year in which depreciation is claimed. All costs related to the purchase, installation, and preparation of the solar system must be capitalized and included in the depreciable basis. The property must be placed in service within the United States. |
Allows accelerated depreciation over 5 years for solar energy systems under the General Depreciation System (GDS).The depreciable basis is reduced by 50% of the ITC claimed (e.g., if a 30% ITC is claimed, the basis is reduced by 15%).
Provides additional tax savings by reducing taxable income through faster depreciation. |
It’s important to note that eligibility requirements may vary based on individual circumstances and changes in tax laws. It’s always recommended to consult with a tax professional or energy advisor to determine your specific eligibility for solar tax credits and programs. If you need help, contact us. Our renewable energy consultants are here to assist you.
The Inflation Reduction Act (IRA) and Solar Farming
The Inflation Reduction Act (IRA renewable energy) is a landmark legislation that aims to address climate change, lower energy costs, and promote economic justice. It recognizes the critical role that farmers, ranchers, and forest landowners play in combating climate change. These individuals are uniquely positioned to implement nature-based solutions and adopt climate-smart agricultural practices.
The IRA acknowledges the potential of nature-based solutions and climate-smart agriculture to deliver economic, climate, and resilience benefits, so it provides significant financial benefits and support for farmers and ranchers who invest in solar energy. For example, the legislation allocates $19 billion to support farmers adopting climate-smart activities, such as soil health practices, cover crops, and renewable energy.
Specific funds are also included in the IRA to assist economically distressed farm loan borrowers and underserved farmers, ranchers, and foresters. This demonstrates the government’s commitment to ensuring that all farmers have access to solar energy’s benefits.
You can see more about the IRA’s benefits for agriculture projects here.
The Investment Tax Credit (ITC) and Production Tax Credit (PTC) are two key components of the IRA’s support for solar adoption. These tax credits offer significant financial incentives to farmers, companies, and individuals who invest in solar energy systems. Let’s see more about them:
Federal Investment Tax Credit (ITC)
The Investment Tax Credit (ITC) is a federal commercial solar tax credit that allows farmers to deduct 30% of their solar installation costs from their federal taxes. This significantly reduces the upfront cost of adopting solar energy and can make the investment more financially viable.
Eligibility
The ITC is available for investments in solar energy systems made after 2021. To qualify, the project must meet specific criteria, including:
- Placed in service: The solar system must be placed in service by December 31, 2032.
- Eligible property: The project must include qualifying solar energy properties, such as solar panels, inverters, and racking systems.
Example
Farmer Scenario:
John runs a dairy farm in Wisconsin and wants to install a 1-megawatt (1,000-kilowatt) solar energy system to power his milking equipment and reduce his electricity bills. The total installation cost for the solar system is $2,880,360 (1,000 kW * $2,880.36 per kW).
How ITC Works for John:
- Eligibility: Since John is an agricultural producer using the solar system for his business operations, he qualifies for the Investment Tax Credit (ITC).
- Tax Credit Calculation: With the ITC offering a 30% tax credit on the cost of solar installation, John can claim a $864,108 tax credit on his federal taxes ($2,880,360 * 30% = $864,108).
- Benefit: This reduces John’s upfront investment from $2,880,360 to $2,016,252, allowing him to save significantly on his solar project costs.
Production Tax Credit (PTC)
The Production Tax Credit (PTC) is an alternative to the ITC that provides a per-kilowatt-hour (kWh) tax credit for electricity generated by qualified solar projects. The PTC is available for the first ten years of a project’s operation, making it more suitable for large-scale solar farms with high energy production.
The PTC offers significant financial benefits for projects in high-sunlight areas or those with high capacity factors, where energy output is consistently high. By incentivizing ongoing energy production, the PTC can provide a steady stream of tax savings over the project’s lifetime.
Eligibility
To qualify for the PTC, a project must meet the following criteria:
- Placed in service: The solar system must be placed in service after 2020.
- Qualified property: The project must include qualifying solar energy property.
- Minimum size: The project must meet specific minimum size requirements.
Example
Farmer Scenario:
Maria owns a large crop farm in California and decides to set up a 500-kilowatt solar farm to sell electricity back to the grid. Her solar farm produces 1,500,000 kilowatt-hours (kWh) of electricity in its first year of operation.
How PTC Works for Maria:
- Eligibility: Maria’s solar project qualifies as a renewable energy facility, making her eligible for the PTC.
- Tax Credit Calculation: The PTC provides a tax credit per kWh of electricity produced. If the PTC rate is 2.75 cents per kWh, Maria can claim a tax credit of $41,250 in the first year (1,500,000 kWh * $0.0275 = $41,250).
- Benefit: Maria receives ongoing tax benefits for the first 10 years based on her solar farm’s electricity production, making it ideal for large-scale projects with high energy output.
Which is Better for Farmers: ITC or PTC?
Farmers must choose between the ITC and PTC for a given solar project, as they cannot be combined. The best choice depends on various factors, including:
- Project size: For smaller projects, the ITC may be more beneficial due to the upfront cost reduction.
- Energy production: For larger projects with high energy output, the PTC can provide significant long-term tax savings.
- Financial goals: Consider your overall financial goals and the timing of your tax benefits.
Example: A farmer with a large-scale solar project might choose the PTC to benefit from consistent tax savings over the project’s lifetime, while a farmer with a smaller project might prefer the ITC for a more immediate upfront cost reduction.
Inclusion of Energy Storage Systems
The IRA expands the definition of eligible property to include energy storage devices with a capacity of at least 3 kWh. This encourages farmers to pair solar installations with battery storage, which can help manage energy use more effectively and increase resilience.
Additional Bonuses and Incentives
In addition to the ITC and PTC, the IRA also offers bonus credits called IRA adders that can increase the tax credit for eligible solar projects. These adders include:
- Domestic Content Adder: It provides an additional bonus credit for projects that meet certain domestic content requirements. This means that a portion of the components used in the solar project must be manufactured in the United States.
The bonus amount varies based on the percentage of domestic content. For example, projects with a higher percentage of domestically manufactured components may qualify for a larger adder. - Energy Community Adder: It provides an additional bonus credit for projects located in designated energy communities. These are areas that have been adversely impacted by the decline of fossil fuel industries. By investing in solar energy in energy communities, businesses can help revitalize these areas and create new economic opportunities.
- Low-Income Communities Adder: It offers an additional bonus credit for projects located in low-income communities. This helps to address energy equity and ensure that all communities have access to the benefits of renewable energy.
USDA’s Rural Energy for America Program (REAP)
The Rural Energy for America Program (REAP) is a valuable resource for agricultural producers and rural small businesses seeking financial assistance for renewable energy systems and energy efficiency improvements.
REAP is currently open for Fiscal Year 2024, with an application window that closes on September 30, 2024. This program is part of the USDA’s broader efforts under the Inflation Reduction Act to support renewable energy in rural areas.
REAP offers both grant funding and guaranteed loans to help eligible applicants implement renewable energy projects and improve energy efficiency. Find more information here.
Eligibility Criteria for REAP
To qualify for REAP funding, applicants must meet the following criteria:
- Agricultural Producers: Must derive at least 50% of their gross income from agricultural operations.
- Rural Small Businesses: Must be located in eligible rural areas with populations of 50,000 residents or less.
The following entities are eligible for REAP:
- Private for-profit entities
- Cooperatives
- Electric utilities
- Tribal corporations
Applicants must also have no outstanding delinquent federal taxes, debt, judgment, or debarment.
Application Process and Requirements
To apply for REAP funding, applicants must submit a comprehensive application, including the following:
- Project description: A detailed explanation of the proposed renewable energy or energy efficiency project.
- Cost estimates: A breakdown of project costs, including materials, labor, and equipment.
- Financial information: Financial statements and other relevant financial data.
- Matching funds: Applicants may be required to provide matching funds, which can be in the form of cash, in-kind contributions, or other assets.
- Energy assessment: An energy assessment may be required to demonstrate the project’s energy savings potential.
ArtIn Energy’s energy consulting services can help you navigate the REAP application process and ensure your projects meet all eligibility requirements. Contact us to learn how our team can help you.
Example
Farmer Scenario:
Samantha is a fruit farmer in rural Oregon and wants to install a 200-kilowatt solar panel system to reduce her farm’s electricity costs. The total project cost is $576,072 (200 kW * $2,880.36 per kW).
How REAP Works for Samantha:
- Eligibility: Samantha’s farm is in a rural area, and she derives over 50% of her income from agricultural operations, making her eligible for the Rural Energy for America Program (REAP) grants and loans.
- Funding Calculation: Samantha applies for a REAP grant and receives funding for 50% of her project costs. She also secures a loan guarantee for the remaining 50%.
- Benefit: With a REAP grant covering $288,036 (50% of $576,072) and a loan guarantee for the other $288,036, Samantha can complete her solar project without a significant initial outlay, leveraging federal support to invest in renewable energy.
Modified Accelerated Cost Recovery System (MACRS)
MACRS allows businesses to recover the cost of their solar installations more quickly through accelerated depreciation. This means that farmers can deduct a more significant portion of the cost in the early years of the investment, reducing their taxable income and providing significant tax savings. Check our detailed MACRS guide to learn everything about this program.
Eligibility for MACRS
To use MACRS for solar investments, you must:
- Own the solar system.
- Use the solar system for business operations.
- Have a tangible property with a determinable useful life.
Solar energy systems generally qualify as tangible property with a useful life of 5 years under MACRS.
Example
Farmer Scenario:
Tom operates a poultry farm in Georgia and installs a solar energy system costing $200,000 to power his chicken houses. He claims the 30% ITC, reducing his upfront cost, and wants to use MACRS to maximize his tax benefits.
How MACRS Works for Tom:
- Eligibility: Tom owns the solar system, uses it for business operations, and the property is tangible with a determinable useful life, meeting MACRS requirements.
- Depreciation Calculation: Under MACRS with the General Depreciation System (GDS), Tom can depreciate the solar system over five years. After applying the ITC, the depreciable basis is reduced by 15% ($200,000 – $30,000 ITC = $170,000, then $170,000 * 85% = $144,500).
- Benefit: Tom can deduct $144,500 over five years using accelerated depreciation methods, which significantly lowers his taxable income and provides substantial tax savings early in the investment.
Optimize Your Land’s Value with a Solar Farm – Book a Free Consultation!
Solar energy offers a unique opportunity to generate income and increase the value of your land. By converting your property into a solar farm, you can diversify your revenue streams and contribute to a more sustainable future.
At ArtIn Energy, we can help you explore the potential of solar farming and guide you through the entire process. From feasibility studies to project implementation, we’re committed to providing you with the support and high-quality renewable energy solutions you need to maximize your investment.
Contact us to schedule a free consultation and learn how solar farming can benefit your business.