The solar tax credit for businesses: Complete overview

If you’re a business owner interested in going solar, the federal Investment Tax Credit (ITC) is one of the smartest ways to cut the cost of your installation by 30%, as well as reduce your federal taxable income liability.

The simplest way to think of the ITC for businesses is that it’s essentially the same as the federal solar tax credit for homeowners. Your business must own the system - not lease it or have a power purchase agreement – and it needs to be installed and operational after 2022. Beyond that, there aren’t many other requirements to qualify for the ITC solar tax benefit.

Disclaimer: This article is intended to provide an informational overview of the federal solar tax credit for interested homeowners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a licensed tax professional.

Laid out in Section 48 of the U.S. tax code, the ITC for businesses provides an incentive for investing in clean energy -- one of the key incentives is a dollar-for-dollar tax credit  based on the cost of your solar panel system. 

Through the Inflation Reduction Act of 2022, the ITC was set to 30% of the cost of the system, and extended until 2034. While it's easy to capture the 30% tax credit in 2024, there are additional criteria to hit the full 30% tax credit in 2025 and beyond for larger commercial projects over 1 megawatt (MW).

After 2025, the continuation of the ITC for commercial solar systems will depend on whether the solar and electric sectors meet the Biden administration's goals of reaching a 75% reduction in emissions below 2022 levels.

A commercial project can also be eligible for additional credits beyond the 30% cap if it meets specific criteria. These escalators include:

• An additional 10% if 40% of the manufactured components were produced in the U.S (also known as the domestic content bonus).

• An additional 10% if the project is located in what’s considered an “energy community,” meaning it has brownfield sites, experienced mine and coal plant closures, or has an economic base involving fossil fuels.

• An additional 10% if the project is less than 5 MW in capacity and is located in a low-income community or on tribal land.

• An additional 20% if the project is less than 5 MW and is installed as part of a low-income residential building project or economic benefit system.

The 2022 Inflation Reduction Act is a landmark piece of federal legislation that, in part, is designed to supercharge investments in clean and renewable energy projects in the U.S.. The IRA provides tax incentives and credits in several ways for businesses of all shapes and sizes that can ultimately save your business tens of thousands of dollars. For example, a business can receive the 30% tax credit if it invests in a battery storage system that’s 5 kWh or larger, and commercial heat pumps qualify for the tax credit under the IRA, too.

It’s important to understand that the ITC is a tax credit, not a tax deduction, making it more valuable. It can also be combined with additional incentives, such as MACRS and bonus depreciation, to make solar installations an even more attractive investment. Here’s how:  

To keep the math simple, let’s say your business has earnings of $100,000 and installed a commercial solar system valued at $100,000. Based on a 37% tax rate, you’ll pay $37,000 in taxes. Both MACRS and bonus depreciation reduce your taxable earnings, meaning for a $100,000 solar project, bonus depreciation will reduce your taxable earnings by $87,000. So instead of paying taxes on $100,000, you'll pay taxes on $13,000 in income, reducing your year one tax bill from $37,000 to $4,810. 

The ITC, on the other hand, is a credit that reduces what you owe in taxes. Instead of applying it to your taxable earnings, the ITC reduces your tax bill itself. So, with the same example above – a business with $100,000 in revenue installing a $100,000 solar system –  the ITC’s 30% tax credit would reduce how much you owe in taxes by $30,000, dropping what you owe from $37,000 to $7,000. 

As you can see, when the ITC is combined with MACRS and bonus depreciation, the tax savings build up quickly.

The value of the ITC is based on the price of your solar panel system, which is ultimately determined by how much electricity you use and how big your property is.

The quickest way to approximate how much solar your business needs is to start with your electricity bill. Find how much electricity your business uses monthly (in kilowatt-hours, or kWh), and divide that number by 100.That gives you a very rough estimate of the kilowatts (kW) of solar that you'll need at your property. If you use 4,500 kWh of electricity per month, you'll need about a 45 kW solar panel system to offset your electricity usage.

From there, you can look at EnergySage data to understand how much solar costs in your state and multiply that price point by the size of your system. For instance, multiplying a 45kW system by $2.75 per watt gives you an estimated price tag of $123,750. Keep in mind that the actual price can vary depending on a number of factors, including roof size, and solar coverage.  

Once you can estimate the cost of the new solar system,  the math is very simple: for 2024, the ITC provides a 30% credit, meaning you would cut your tax bill by $37,125 for the 45kW system mentioned above.

While the ITC works nearly the same exact way for businesses as it does for homeowners looking to go solar, there are two key differences that can make a significant impact for businesses, specifically key milestones around when the projects need to be started and completed.

The commence construction / safe harbor clause

For residential solar installations, in order to qualify for the ITC in a particular tax year, a project must be fully installed and receive permission to operate (PTO) from your local utility. When it comes to commercial installations, however, the ITC has  “commence construction” and “safe harbor” clauses, both of which allow you to claim the full ITC on your annual returns, even if you have not yet completed the installation and interconnected to the grid.

The “commence construction” clause states that the project's construction must have started by the end of the calendar year to qualify under that tax year. In other words, as long as you've started your installation by December 31, 2024, you can claim the full 30% ITC when you file your 2024 taxes. But in the case of a residential property, if you didn’t receive PTO from your utility until January 2025, you would have to wait to claim the ITC until you file your 2025 taxes.

IRS guidance explains an alternative method of demonstrating that you've "commenced construction." Instead of having to physically start installing the solar panel system, the IRS says you can claim the total ITC cost if you've already paid for 5% of the project cost. Most installers suggest a 10% deposit. So even if the final price tag increases, you’ll still have some built-in wiggle room to meet the 5% “commenced construction” eligibility standard.

In each of these scenarios, there is a limit to how far out you can push the construction – you'll need to complete the project within the next five years. But, if your goal is to claim the ITC for a particular tax year and install the system right after the start of the new year, this shouldn't be a problem.

ITC adders

As mentioned above, the IRA changed the tax incentives available to businesses by introducing “adders” that provide additional tax credits beyond the standard 30% tax credit in certain circumstances. These adders – which are stackable and can each provide up to 10 additional percentage points of tax credits for each project – are not available to residential solar projects, unless they are a third-party-owned system (i.e., a lease or a PPA) since the project would technically be owned by a business instead of a homeowner.

As a commercial entity interested in going solar, be sure to check which adders your solar project might be eligible for, and work with your solar installer to ensure the project is designed with those adders in mind.

At EnergySage, we don't just help homeowners go solar–we help businesses explore their solar options, too. When you register for a free account with EnergySage, we'll provide you with an initial estimate of how much solar you need for your business, how much it might cost, and how much you can save with solar. If it looks like a suitable investment for you, we'll gather custom quotes from multiple solar companies in your area and help you decide which is right for your business.