The U.S. government continues investing in renewable energy, specifically solar, geothermal, and other forms that are quickly replacing traditional energy sources. Of course, the idea of implementing renewable energy is great until you see the potential costs associated with the switch. Many businesses are still struggling with monthly operating costs on the back end of COVID-19’s impact so what would compel businesses to make the switch to renewable energy? For starters, the solar investment tax credit.
One of the key incentives in the marketplace today is the Solar Investment Tax Credit (ITC). If you’ve spent any amount of time in the electrical or renewable energy space, you’re familiar with this term, but you may not be familiar with its potential. For the sake of clarity, many, if not most references to the solar tax are actually referring to the Solar Investment Tax Credit. Also, while the ITC is available to residential and commercial, we will be focusing on commercial buildings during this article.
What Is the Solar Investment Tax Credit (ITC)?
According to the U.S. Department of Energy, the Solar Investment Tax Credit is:
“[A] tax credit that can be claimed on federal corporate income taxes for 30% of the cost of a solar photovoltaic (PV) system that is placed in service during the tax year. (Other types of renewable energy are also eligible for the ITC but are beyond the scope of this guidance.)” (Source: U.S. Department of Energy, “Guide to the Federal Investment Tax Credit for Commercial Solar PV”)
President George W. Bush signed the Solar ITC into law as part of the Energy Policy Act of 2005 (P.L. 109-58). It has two distinct tracks of eligibility – residential and commercial – that started with a base percentage deduction of the cost of a photovoltaic (PV) system. Building owners and businesses who want to take advantage of the ITC need to know that the system installation date is crucial for maximizing the ITC deduction. That deduction percentage correlates to when the construction of a building begins:
- The starting deduction percentage for system costs was 30% for building systems, not the building themselves, that were built on or before December 31st, 2019.
- The deduction percentage for system costs decreased to 26% on January 1st, 2020 for building systems built in 2020.
- The next change was supposed to happen on January 1st, 2021 when the deduction percentage was scheduled to decrease from 26% to 22% for building systems whose construction started in 2021. However, recent legislation passed by Congress as part of HR 133 extended the 26% deduction percentage through December 31st, 2022. With the extended deadline, the next decrease to 22% will occur on January 1st, 2023 and apply to building systems built in 2023.
- The final decrease from 22% to 10% is set to happen on January 1st, 2024 for commercial building systems completed in 2024. Additionally, any photovoltaic (PV) system installed in commercial buildings after 2024 can receive a maximum system costs tax deduction of 10%. Residential buildings lose their eligibility for the 10% deduction starting in 2024.
Can You Receive the Solar ITC If You Lease a Photovoltaic System?
The short answer is no, your building is not eligible for the Solar Investment Tax Credit if you only lease your PV system. Many developers and solar firms will offer a solar power purchase agreement (PPA), which is where the developer is responsible for the design, permit, financing, and installation of a PV system with limited costs directed toward the end-owner of the system (i.e., the leasee). Businesses who are leasing or relying on a PPA are not eligible for receiving the solar investment tax credit because they do not own the system outright.
You need to purchase a PV system for your building, an investment the U.S. government wants building owners to make to ensure greater energy efficiency into the future. The good news is that if you own a PV system and don’t owe enough in taxes to claim the entire credit in a given year, you may be eligible to roll over the delta difference in credit into the next year provided the ITC is still available.
Solar Investment Tax Credit Eligibility for Commercial Properties
Of course, the language of eligibility around the solar ITC is complicated, at best, thanks to bureaucrats. The two key terms to keep in mind are “commencing construction” and “placed in service”. When a system is “placed in service”, it often refers to a system that is built offsite and then located to its end destination for installation. That leads us to the other key term “commencing construction”.
According to the U.S. Department of Energy, there are two key requirements for commercial properties to be eligible for receiving the solar ITC:
- “At least 5% of final qualifying project costs are incurred. Expenses have to be “integral” to generating electricity, and equipment and services have to be delivered (or delivered within 3.5 months after payment).”
- Or, “physical work of significant nature” is commenced on the project site or on project equipment at the factory. This does not include preliminary work like clearing the site, building a perimeter fence, securing road access, Physical work has to be “integral” to the project. It needs to be significant work that is integral to the project’s development. However, one provision is that the system project “does not require proof of continuous work if the system is placed in service within four years.”(Source: U.S. Department of Energy, “Guide to the Federal Investment Tax Credit for Commercial Solar PV”)
These are key details to understand and keep in mind when it comes to building your PV system to be eligible for the solar ITC during a specific calendar year.
How to Apply for the Solar Investment Tax Credit (ITC)
If you’re a residential property owner, you will need to file for the solar ITC using the IRS Form Fixed 5695. If you’re a commercial property owner who owns the PV system, you will need to apply for the solar ITC using IRS Form 3468. Again, since we’re focusing on commercial properties in this article, let’s walk through the process of completing IRS Form 3468. Note: BizReps does not present itself as a tax professional or tax expert. We highly recommend consulting with a professional tax advisor for more specific tax questions you may have concerning IRS Form 3468.
That said, the Solar Investment Tax Credit is just one federal tax incentive for commercial building owners. There are dozens and dozens of other available rebates and tax incentives for commercial building owners right now. Our team at BizReps knows the exact rebates and tax incentives at the municipality, county, state, and federal levels to help offset most, if not all of a PV system. See how much you could save by connecting with our team today.
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