Is It the Right Time for Your Company To Consider Solar Panels?
Are you considering solar energy for your business but worried about the costs versus potential benefits? The Solar Investment Tax Credit (ITC) and the Solar Production Tax Credit (PTC) are available to help offset expenses and make solar power an attractive option for your business. The Inflation Reduction Act of 2022 has extended and enhanced previous investment and production tax credits available for qualifying solar energy installations.
Solar Investment Tax Credit (ITC)
The Solar Investment Tax Credit in Section 48 of the Internal Revenue Code allows businesses a federal tax credit of up to 30% of the cost of solar energy projects. To qualify for this credit, the property must be tangible personal property that is located at a qualified facility and used for generating electricity. There is a base credit rate of 6% that can be extended to 30% by meeting specific requirements.
To be eligible for the ITC, your facility must have a maximum net output of less than 1 megawatt and must be constructed no later than January 29, 2023. Furthermore, to receive the complete 30% tax credit, the project must meet specific prevailing wage and apprenticeship requirements of IRC Section 45 and 48.
To adhere to the prevailing wage requirements, wages should not be less than the prevailing rates for construction in the location of the installation. To fulfill the apprenticeship requirements, a specific percentage of labor hours must be completed by qualified apprentices. For 2023, this percentage is 12.5%, and it will increase to 15% for 2024 and beyond.
Expenses eligible to be included in the qualified investment of the installation process include but are not limited to solar panels, concentrating solar-thermal power (CSP) equipment, installation costs, energy storage devices and sales tax. It should be noted that the installations must be done within the United States, meet a percent of new equipment standards and cannot be leased to a tax-exempt entity. Solar installations are also available for Section 179 depreciation. It is also important to note that the ITC vests at a rate of 20% annually. If the system is sold before it is fully vested, the unvested portion of the ITC must be repaid.
Solar Production Tax Credit (PTC)
The Solar Production Tax Credit of Section 45 and 45Y of the Internal Revenue Code allows businesses an annual tax credit lasting up to ten years from when the qualified solar equipment is placed in service. If the installation adheres to the labor requirements issued by the Treasury Department, the current annual credit is 2.75 cents per kilowatt hour (kWh). The credit rate is adjusted for inflation yearly by the Department of Commerce.
When it comes to claiming credits for taxes, taxpayers may either choose the ITC or PTC but cannot claim both. To make the best decision, there are several factors to consider, such as the nature of your business, the scope of the project, applicable depreciation laws, and the project’s location. These considerations play a significant role in determining the most advantageous credit option.
State & Local Solar Considerations
In addition to the federal tax credits, many states and local governments are offering incentives to make solar a more attractive option for businesses. For instance, the New York State Energy Research and Development Authority (NYSERDA) provides grants and appealing financing options. Additionally, companies may be eligible for significant reductions in out-of-pocket expenses by working with a participating contractor business.
If you are considering switching to solar energy for your business, contact the tax professionals at Dannible & McKee to ensure you maximize your tax savings during the process.
Contributing author: Mickel Pompeii, CPA, CDA, is a tax partner with 13 years of experience in taxation and tax planning for individuals and closely held companies. He is responsible for overseeing tax engagements for a variety of the firm’s clientele. For more information on this topic, contact Mickel at firstname.lastname@example.org or (315) 472-9127.