Disclaimer: This material has been prepared for informational purposes only. It is subject to change and should not be relied on for tax or financial advice of any kind. You should always consult with your own tax advisors before making purchasing, investment, or tax decisions.
Going solar can save your business a lot of money over the long term by reducing or even eliminating your electricity costs. But installing a commercial solar array typically requires a large upfront payment. To ease the burden, the federal government offers tax incentives that can help make commercial solar panel installation financially viable for your business.
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Commercial solar installations are often classified as a business expense, which means you may be able to write solar panels off on your taxes. But a commercial solar panel tax write-off isn’t the only tax benefit of commercial solar installation—commercial solar panels also qualify for a federal tax credit and MACRS depreciation.
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The federal solar tax credit, also known as the solar Investment Tax Credit (ITC), is a commercial solar incentive that reduces your federal income tax liability by a percentage of your solar installation costs. The federal solar tax credit in 2023 is worth 30% of your solar installation costs and will be available from 2022 until 2032.
The tax credit has been in effect for many years but was recently expanded by the Inflation Reduction Act. Because of this, you may hear it referred to as the Inflation Reduction Act solar tax credit.
To claim the Inflation Reduction Act solar panel tax credit, a business must file IRS Form 3468 with its annual tax return. To be eligible for the credit in a given year, a business must have commenced construction of its solar PV system before year-end.
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Most commercial solar installations are eligible for the Modified Accelerated Cost Recovery System (MACRS). MACRS is a depreciation system that was designed to help businesses recover their investments in certain tangible assets through annual deductions over a specified period of time. Qualifying commercial solar energy equipment is eligible for a cost recovery period of 5 years.
For commercial solar equipment on which the solar tax credit is claimed, the business must reduce the project’s depreciable basis by one-half the value of the 30% tax credit. This means the business is able to deduct 85% of its tax basis.
Have questions about commercial solar energy tax write-offs and incentives? Boston Solar is here to help. We are the leading commercial solar installer near you in Massachusetts with over 10 years of experience installing solar energy systems. We install custom-built commercial solar systems of all sizes and can recommend the best solar panels and products for your business. When you install solar panels on your home, you start saving money on your electricity bill almost right away. Solar panels can dramatically reduce your monthly energy bill, starting on day one. It doesn’t take long for those savings to cover the installation costs, meaning you keep a little more money in your pocket each month.
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But the savings don’t stop there. Not only will solar panels dial down your monthly energy bill, but you’ll also get one heck of a tax credit on your IRS filings next spring. It is Uncle Sam’s way of saying “Thanks for helping our country take a step forward.”
So how do you claim the federal solar tax credit for your clean energy? And what does it cover? Let’s dive in.
First and foremost, you should know that the federal solar tax credit is known more formally as the Investment Tax Credit (ITC). It’s part of a congressional effort to encourage more widespread adoption of solar panels throughout the United States – and it has been very effective in doing just that.
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According to the Solar Energy Industries Association, the solar power industry in the United States has grown by 10, 000% since the ITC went into effect. This has led not only to a greater adoption of residential and commercial solar nationwide, but billions of dollars for the U.S. economy.
The ITC was originally enacted in 2006. Until 2019, homeowners received a 30% tax credit when they installed solar panels. The tax credit dropped to 26% in 2020, was slated to decrease to 22% in 2021, and would have been permanently eliminated for residential solar energy systems starting in 2022.
Fortunately, Congress voted to extend the federal solar tax credit in 2020. This means that homeowners can still enjoy a 26% tax credit on their solar panel system if it is installed and activated in 2022.
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One of the most attractive features of the ITC is that the tax credit covers the “total cost of installation.” This can include:
The federal solar tax credit is not capped at a certain dollar amount. No matter how much you spend on your solar panel system in 2022, you can claim a tax credit worth 26% on the total cost.
Solar panel systems are far less expensive than they were even a few years ago, both in terms of the equipment itself and the costs of installing it. How much you spend will largely depend on how extensive a system you decide your home needs.
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Before you start the installation, it is important to get a home energy audit to assess your home’s efficiency and identify opportunities for energy savings. A home energy audit is key for designing an effective solar panel system. What’s more, the cost of the audit can be calculated as part of the tax credit.
It’s important to understand that the ITC is a tax credit, not a tax deduction. What’s the difference? We aren’t accountants or attorneys, but we’ll take a quick stab at the distinction:
So, if your total tax bill for the year is $14, 000 but you earn a federal solar tax credit of $5, 000, then you can reduce the amount by $5, 000 off your tax bill just like that. You’d only owe $9, 000 in income tax for the year. (These numbers are offered purely as a hypothetical illustration; be sure to discuss your specific tax situation with a qualified tax professional in your area, as your tax situation may be more complicated.)
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Generally speaking, tax credits offer more profound tax savings than tax deductions do. Too many websites and blog articles talk about the ITC as a “tax deduction.” Don’t be misled. We’re talking about a federal tax credit here – and that’s a big deal.
The federal solar tax credit is available to residential solar adopters as well as commercial entities anywhere in the United States. Although the majority of residential adopters are homeowners, you can also claim the ITC if you are a “tenant-stockholder at a cooperative housing corporation” or have membership in a condominium. Per the U.S. Office of Energy Efficiency & Renewable Energy, your tax credit will encompass “the amount you spend contributing to the cost of the solar PV system.”
Homeowners can claim the ITC if they install solar panels on a secondary residence (such as a vacation home). You will be unable to claim the federal solar tax credit, however, if the property is primarily a rental unit.
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Finally, you are not eligible for the federal solar tax credit if the refund exceeds your tax liability for the year. However:
“Homeowners may get a tax refund at the end of the year due to the tax credit, if the reduction in tax liability means there was overpayment during the year. This can often occur when employers deduct taxes for employees over the course of the year. However, such refund is still limited by the taxpayer’s total tax liability. However, you can carry over any unused amount of tax credit to the next tax year.” Why 2022 Is the Year to Go Solar If You Can
Nothing lasts forever, and the federal solar tax credit is no exception. If you want to invest in solar energy for your home, 2022 is the last year to enjoy maximum benefits under the ITC.
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Starting in 2023, the federal tax credit will drop to 22%. After that, unless Congress extends it again, there will be no residential tax credit on solar panels.
Some states have also introduced tax credits, rebates, and other incentives to encourage the growth of solar energy. Unfortunately, Colorado does not have a state tax credit for solar panel systems.
However, this does not mean that our state is lacking in support for solar. Public utilities throughout Colorado offer incentives for customers to switch to solar, including:
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Residential solar adopters are also exempt from sales tax on solar panels and other equipment involved in the installation of your energy system. In addition, “Renewable energy personal property that is located on a residential classified property, owned by the residential property owner, and produces energy that is used by the residential property is exempt from Colorado property taxation.”
You will need to complete Form 5695, Residential Energy Credits and file it as part of your 2022 tax return. As we all know, tax documents can be complicated. If you have any questions, it is in your best interest to contact a tax professional for assistance.
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