Understanding the Federal Solar Tax Credit
10/10/2022Solar systems are an effective way to increase your energy efficiency, and many companies are surprised to learn that the government offers incentives to encourage businesses to invest in renewable energy.
Continue reading to discover:
- How to navigate the 2022 Federal Solar Tax Credit
- Requirements your business needs to meet to be eligible for funding
- Frequently asked questions regarding commercial solar incentives
- Where to find a quality renewable energy provider in California
Your Complete Guide to the Federal Solar Tax Credit in 2022
The Federal Solar Tax Credit, also referred to as the "solar investment tax credit" (ITC), is a set amount of funding that can be claimed on your federal corporate income taxes. Essentially, it covers 30% of the cost of a solar photovoltaic (PV) system placed in service during the 2022 tax year. This August, congress passed a solar tax credit extension that raised the amount covered from 26% in 2021, to 30% for projects completed during the 2022 calendar year.
If your business is considering renewable energy, you'll need to act quickly, as systems commencing construction in 2023 or after can only receive a maximum tax credit of 10%.
Eligible Projects
To be eligible for the federal tax credit (section 48 of the tax code), your new solar system must be:
- Used by a business that pays U.S. federal income taxes. (Tax-exempt entities such as nonprofits or charities don't qualify)
- Located in the United States or a surrounding U.S. territory.
- Your solar system must be brand new or have limited previous use, meaning no more than 20% of the PV system can be classified as “used equipment”.
- The energy harvested must be used for daily facility operations (i.e. you can't use the power generated for heating swimming pools or other luxury items)
Eligible Expenses
The Federal Solar Tax Credit is calculated by multiplying the applicable tax percentage (30%), by the "tax basis", which is the amount invested in your property. Eligible property includes the following:
- Solar PV panels
- Inverters
- Racking
- Balance-of-system equipment
- Installation costs and indirect costs
- Step-up transformers
- Circuit breakers
- Surge arrestors
Additional considerations can also be applied to energy storage devices, but only if they're charged by a renewable energy system more than 75% of the time. For more information on the logistics behind storage devices, take a look at IRS private letter ruling 121432-12. Hopefully, the above information served as a good introduction to the Federal Solar Tax Credit. As previously mentioned, time is running out to claim your 30% deduction.
If your business is considering implementing renewable energy, you probably have a few questions. Keep reading to gain some clarity on the process.
Frequently Asked Questions Regarding Commercial Solar Incentives
Below are a few common questions your may have when navigating the credit process:
How Does the Federal Solar Tax Credit Work?
For qualified businesses, the Federal Solar Tax credit offers a 30% rebate on the total cost of your new solar system. You'll need to cover the costs associated with new installation, keep proof of expenses, and then file a rebate form during tax season to receive your tax credit.
Do You Get a Tax Credit for Leasing Solar Panels?
It depends on the way your contract is structured. If you're simply leasing the equipment, you won't qualify, as leased items don't count as improvements to your facility. However, if you've signed a lease-purchase agreement, you would eventually qualify once the system is paid off, as the government recognizes that as a permanent improvement to your facility. Even if you don't directly receive federal energy credits, the cost savings are still passed down to you.
How Do I File a Federal Tax Credit?
Once you've spent the money on a new solar system, the government needs proof of installation before you can claim your solar panel tax credit. To apply, the owner of the system needs to fill out an IRS Form to receive their energy credit. Follow the below steps to claim your energy rebate: * Compile all of your expense receipts and total them up. Fill out the IRS Form 5695 to enter the total cost of your solar project, including:
- Materials
- Labor costs
- Soft Costs
- Lastly, file your renewable energy credit information into form 1040 during tax season.
Does the Federal Solar Tax Credit Strictly Cover New System Installation?
While the Federal Solar Tax credit revolves around new system installation, California offers its own set of incentives focused on batteries, even when installed without solar. If you currently have a solar system in place, investing in batteries is a highly effective way to increase the efficiency of your system—all while getting paid for it.
Can I Take Advantage of the Tax Credit if My Business Doesn't Meet Tax Liability Requirements?
Good question. In most cases, you can only take advantage of the tax credit if you have a tax liability that is significant enough. However, there's a loophole. If your business doesn't meet the tax liability requirements, Pacifico Power can circumvent this hurdle by owning the system and taking the credit. This means that we'll install your new system and file the federal solar tax credit for you. The money saved will be factored into your overall cost, as we'll deduct 1/3 of the price to compensate for the tax returns we receive on your system.
Pacifico Power: Your Trusted Renewable Energy Provider
California businesses looking to improve their bottom line enlist the help of Pacifico Power. As a full-service solar provider, we have solutions for any of your renewable energy needs. Looking to capitalize on the Federal Solar Tax Credit before it drops by 20%? Reach out to Pacifico and schedule a free assessment. Our team has years of experience navigating solar rebates, and we're eager to provide you with the infrastructure to become more energy efficient.