Solar Tax Incentives
The information below is sourced from the federal Office of Energy Efficiency and Renewable Energy but does not constitute professional tax advice or other professional financial guidance and may change based on additional guidance from the Treasury Department. It should not be used as the only source of information when making purchasing decisions, investment decisions, tax decisions, or when executing other binding agreements.
The investment tax credit (ITC) is a tax credit that reduces the federal income tax liability for a percentage of the cost of a solar system that is installed during the tax year. Under the Inflation Reduction Act of 2022, there is a new provision for the transfer of credit whereby eligible taxpayers who are not eligible for direct payment, may sell all, or a portion, of the tax credits for a given year to an unrelated eligible taxpayer. Payments for the credit must be made in cash and are not considered gross income, for federal purposes
- To be eligible for the business ITC, the solar system must be:
- Located in the United States or U.S. territories Use new and limited previously used equipment
- Not leased to a tax-exempt entity (e.g., a school), though tax exempt entities are eligible to receive the ITC themselves in the form of a direct payment.
The ITC is calculated based on the cost of building the system, so understanding what expenses are eligible to include is important in determining how much of a tax credit the system is eligible for.
To calculate the ITC, you multiply the applicable tax credit percentage by the “tax basis,” or the amount spent on eligible property. Eligible property includes the following:
- Solar PV panels, inverters, racking, balance-of-system equipment, and sales and use taxes on the equipment;
- Installation costs and certain prorated indirect costs;
- Step-up transformers, circuit breakers, and surge arrestors;
- Energy storage devices that have a capacity rating of 5 kilowatt hours or greater (even if not charged with solar)
Unless Congress decides to renew them, the ITC begins to phase out for projects that commence construction in 2032 or the year the Treasury Secretary determines that there has been a 75% or more reduction in annual greenhouse gas emissions from the production of electricity in the United States as compared to the calendar year 2022
Organizations that don’t pay federal taxes such as non-profits, local or tribal governments can take advantage of the tax credit through a direct cash payment or a transfer of credit.
- Direct pay option: Tax-exempt organizations (i.e. non-profits), states, municipalities, the Tennessee Valley Authority, Indian Tribal governments, any Alaskan Native Corporation, and any rural electric cooperative can receive a refund from the IRS for tax credits on projects placed in service after 2022
Buyers can receive up to an additional 10% credit or cash rebate for products used on tribal land and low-income communities.