Solar incentives for businesses: An overview

It's not just homeowners that can take advantage of the benefits of solar: commercial and industrial businesses can also participate in the clean energy revolution by installing solar–and storage!–on their properties. In fact, in many cases, the incentives for businesses to invest in solar are even better than for homeowners. If you are a business looking to explore your solar options, here are the key incentives to be aware of in 2021.

The best incentives for businesses are tax incentives. Between the federal investment tax credit and federal-level depreciation benefits, like the Modified Accelerated Cost Recovery System (MACRS) and bonus depreciation, the current tax incentives available for businesses nationwide can cut the cost of solar in half!

Business Investment Tax Credit

The federal investment tax credit (ITC) works the same way for businesses as it does for residential properties that install solar. Currently, the ITC provides a credit on your taxes at 30 percent of the value of your solar project.

Notably, the ITC is a tax credit and not a deduction. In other words, if your solar project costs $100,000, the ITC reduces the amount that you owe the federal government by $30,000 instead of lowering your taxable income.

If you want to take advantage of this incentive, now's the time: the ITC won't stick around forever, but you have some time. While it's currently at 30 percent, it's scheduled to decline to 26 percent in 2033 and then drop to 22 percent for businesses beginning in 2034.

Modified Accelerated Cost Recovery System (MACRS)

While the ITC is available to commercial businesses and residential homes, the following two incentives are only available to commercial properties.

MACRS is a depreciation benefit that allows you to recover the value of your solar assets over an accelerated time frame. Unlike the tax credit, depreciation is a way to lower your taxable earnings, meaning it is a way to reduce what you owe on your taxes instead of crediting you towards what you owe. For solar, MACRS allows you to recover the depreciated value of your solar installation over five years.

MACRS is available at the federal level and for some state's taxes–like California. In places where you can take advantage of MACRS both at the federal and state levels, MACRS can combine with the ITC to provide tax incentives worth more than 70 percent of the cost of your solar panel system!

Bonus depreciation

Similar to MACRS, bonus depreciation is a depreciation-based tax incentive available to businesses that invest in solar.

The key difference between MACRS and bonus depreciation is that with MACRS, you allocate the value of the depreciation benefit across five years, whereas with bonus depreciation, you can take the full benefit in the first year of your investment. Your savings will vary based on your tax rate, but in most cases, bonus depreciation effectively doubles the impact of the ITC.

At the federal level, bonus depreciation and MACRS are an either-or deal: you take one or the other. But if you take advantage of bonus depreciation federally, you can still use MACRS at the state level.

Like the ITC, this incentive is time-sensitive. Bonus depreciation for solar is scheduled to expire at the end of 2022–so if you want to take advantage of this incentive, now's the time to start looking at solar for your business.

While the best incentives for solar are often tax incentives, those certainly aren't the only incentives for businesses to install solar. Many states and utilities offer additional programs and incentives to offset the cost of solar further, usually providing an incentive for every unit of energy your solar panel system produces.

With these types of incentives, like a solar renewable energy certificate (SREC) program or the SMART program in Massachusetts, your state or utility will offer an incentive rate of typically a few cents per kilowatt-hour of solar produced. Performance-based incentives (PBIs) are paid out in addition to any bill savings you can achieve with solar, helping to reduce the solar payback period and to further increase the ROI you'll see from investing in solar.

For businesses considering adding storage to a solar installation, there are several incentives to be aware of.

First, the same tax incentives listed above for solar also apply to storage, which can quickly reduce the net cost of adding storage. However, to claim the ITC for storage, businesses have to prove that they're charging the battery with renewable energy at least 70 percent of the time, and the value of the ITC is reduced if the battery is charged by less than 100 percent clean energy. (i.e., if your battery is charged by solar 85 percent of the time, you only get to claim 85 percent of the ITC value.) Beyond that, many states now have solar battery incentives for home and business owners, including California and most Northeastern states.

It's worth pointing out that, like homeowners, many businesses consider storage for the resiliency benefit, i.e., to keep your business running even during a power outage. But for many commercial properties, there's another reason to consider storage: demand charges.

Many utility companies charge large electricity users–like businesses!–extra each month based on not just how many kilowatt-hours of electricity they use per month but also on the single most significant amount of power they pull from the grid over an hour (or fifteen minute period) in the month. These charges, called demand charges, often account for 40 percent or more of a business's monthly electricity bill and can be easily offset by adding storage to a solar installation. Those savings are perhaps the biggest incentive to install storage!

All of these solar incentives available to businesses add up quickly. For many companies, solar is an option with a quick payback period (often less than five years) and a significant return on investment (usually over 10 percent!). To start exploring solar options for your business, sign up for a free account on EnergySage today. We'll work with you to understand your project goals and energy usage and walk you through an initial project design. And if you're ready to get custom quotes for solar from pre-screened installers in your area, we can do that by tapping into our network of nationwide solar installers.