The recent signing of the Inflation Reduction Act (IRA) of 2022 has generated both excitement and confusion for businesses and property owners. There are 730 pages of dense legalese on a range of topics, with various provisions, that require further guidance by the U.S. Department of Treasury. Fortunately, the energy-related tax provisions within this behemoth are an energy transition "game changer" for businesses and property owners looking to transition to low-cost, clean energy in order to lower operating costs and protect against volatile energy prices. Here, we'll explore the solar incentives within that law, with a focus on how they can help your bottom line.What Is the Solar Investment Tax Credit?
Businesses and property owners who install a solar energy system are eligible for the solar investment tax credit (ITC). This federal tax credit allows you to deduct a percentage of the total costs of installing solar from your federal taxes. Keep in mind that unlike tax deductions, a tax credit can be used to directly offset how much you owe the IRS - dollar for dollar. The IRA increased the ITC to 30% which translates to a $300,000 tax credit for a $1,000,000 solar project investment. The new rate lasts until the end of 2032!
The costs that are covered by the tax credit include:
- Solar equipment costs such as solar panels, inverters, wiring, and mounting hardware
- Labor costs for installation, including permitting fees, inspection costs, and developer fees
- New with the IRA: Costs of connecting the solar installation to the grid, including utility costs paid by the project owner
- New with the IRA: Costs of energy storage, even if the storage is not connected to a solar project. The ability to store energy from solar or the grid has many benefits, including that it allows your business to shift the use of grid energy to lower-price times of day.
Does My Business Qualify for the Full 30% ITC?
It depends on the size of the solar project, the timing of the installation, and for some projects, meeting certain wage and apprenticeship requirements.
- Projects with a maximum net energy output of less than one megawatt qualify for the full 30% ITC.
- Larger projects, with a maximum net energy output greater than one megawatt, that start construction prior to the date that is 60 days after the U.S. Department of Treasury publishes guidance, qualify for the full 30% ITC.
- Larger projects, with a maximum net energy output greater than one megawatt, that start construction 60 days after the U.S. Department of Treasury publishes guidance, need to meet the wage and apprenticeship requirements to qualify for the full 30% ITC.
For illustrative purposes regarding sizing, a one megawatt installation would require approximately 100,000 square feet or about 2.5 acres.
Generous Bonus Incentives and Credit Transfer Provision
The Act offers generous bonus tax incentives or "adders" to ensure that the climate investments create American manufacturing jobs and help communities that have benefited less from previous climate legislation.
- 10% bonus for for meeting "domestic content" requirements by using U.S. made products
- 10% bonus for building in specific communities with ties to traditional energy resources
- 10% bonus for building in certain low-income communities
The potential to stack multiple "adders" onto the base ITC means that certain projects could be eligible for a total tax credit of 40%, 50% or more! Going back to our original example for a $1,000,000 solar installation, 50% ITC would result in a $500,000 tax credit.
The Act includes a credit transfer provision, where a business can sell all or part of their tax credits to unrelated persons.
The energy-related tax provisions of this historic legislation have provided an unprecedented economic opportunity for businesses and property owners to go solar. If you would like to discuss how your business might leverage these incentives to transition to lower operating costs and protect against volatile energy prices, schedule a free, no obligation consultation with Solect Energy.
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