The solar tax credit for businesses: Complete overview

The best solar incentive is the federal investment tax credit (ITC). This is true for both home and business owners. By crediting your taxes equal to 30 percent of the cost of your solar panel system, the ITC provides a significant benefit to anyone looking to add solar. For the most part, the business solar (and storage) ITC works nearly the same way as it does for homeowners, with a few key nuances. We'll explain what you need to know about the ITC for businesses in 2023.

Laid out in Section 48 of the U.S. tax code, the business ITC provides an incentive for investing in clean energy by giving you credit on your taxes equal to a percentage of the cost of your solar panel system. As a result of the Inflation Reduction Act in 2022, the ITC was reset to 30% and extended for the next decade at least. However, while it's easy to capture the 30% tax credit in 2023 and 2024, there are a few more criteria to meet to hit the full 30% tax credit in 2025 and beyond for larger commercial projects over 1 M.W.

Two other important things to note: First, after 2025, the continuation of the ITC for commercial systems will depend on whether the solar and electric sectors meet the U.S. Department of Treasury's goals of reaching a 75% reduction in emissions below 2022 levels.

Second, a commercial project can also be eligible for additional credits beyond 30% if it meets specific criteria:

• 10% if 40% of the manufactured components were produced in the U.S.

• 10% if the project is located in an energy community, meaning it has brownfield sites or coal plant closures.

• 10% if the project is less than 5 M.W. in capacity and is located in a low-income community or tribal land.

• 20% if the project is less than 5 M.W. and is installed as part of a low-income residential building project or economic benefit system

The 2022 Inflation Reduction Act is a landmark climate and clean energy bill in the U.S., built to supercharge the growth of the solar industry in the country. The IRA impacts tax incentives and credits in several ways for businesses of all shapes and sizes. You can save tens of thousands of dollars in taxes if you take advantage of all the credits. To learn more about the impact of the Inflation Reduction Act on the ITC for commercial businesses, check out our explainer on the IRA.

We know solar and storage for both homes and businesses, but we recommend talking to your accountant to confirm that these tax benefits apply to your situation.

Importantly, the ITC is a tax credit, not a tax deduction. However, MACRS and bonus depreciation–two other great incentives that help businesses go solar–reduce your taxable earnings. Here's what that means in practice, with an example $100,000 solar panel system for a business with $100,000 in taxable income to keep the math simple:

If you have earnings of $100,000 on a 37 percent tax rate, you’ll pay $37,000 in taxes. Both MACRS and bonus depreciation reduce your taxable earnings, meaning for a $100,000 solar project, bonus depreciation will reduce your taxable earnings by $87,000. So instead of paying taxes on $100,000, you'll pay taxes on $13,000, meaning you'd owe $4,810 instead of $37,000 pre-solar. In that way, bonus depreciation provides a benefit while helping you save on what you owe in taxes.

The ITC, on the other hand, is a direct credit on your taxes: instead of reducing your taxable earnings, the ITC is just a credit towards what you owe. So, with the same example above, and at the current 30 percent rate, the ITC would reduce how much you owe in taxes by $30,000, dropping what you owe from $37,000 to $7,000.

The cool thing about it is that, as a business, you can take advantage of both the ITC and bonus depreciation, leading to pretty significant savings from solar.

The short answer: A lot! The longer answer? It depends!

The value of the ITC is based on the price of your solar panel system, which is based on how much solar you need and can fit, which is ultimately determined by how much electricity you use and how big your property is.

At a high level, the quickest way to approximate how much solar you need is to start with your electricity bill. Find how much electricity you use monthly (in kilowatt-hours, or kWh), and divide that number by 100. Viola! That's a very rough estimate of the kilowatts (kW) of solar that you'll need at your property. If you use 4,500 kWh of electricity per month, you'll need about a 45 kW solar panel system to offset your electricity usage.

From there, you can look at EnergySage data to understand how much solar costs in your state and multiply that price point by the size of your system. For instance, multiplying $2.75 per watt by the 45,000 W system gives you $123,750. After that, the math is very simple: for 2023, the ITC provides a 30 percent credit ($37,125 for the example above).

However, the best way to get a true feel for how much you can save with the solar tax credit is to compare competing solar quotes from high-quality, local providers. We can help you with that!

While the ITC works nearly the same exact way for businesses as it does for homeowners looking to go solar, there are two key differences that can make a significant impact on how the ITC works for your business.

The commence construction / safe harbor clause

With residential solar installations, our general guidance (and what we've heard others in the industry say as well) is that to qualify for the ITC in a particular year, a project must be fully installed and receive permission to operate from the utility. With commercial installations, on the other hand, there's the commence construction and safe harbor clause of the ITC, both of which allow you to claim the full ITC in a given tax year even if you have not yet completed the installation and interconnected it to the grid.

The commence construction clause states that the project's construction must have started by the end of the year to qualify under that tax year. In other words, if you've started your installation by December 31, 2023, you can claim the full 30 percent ITC when you file your 2023 taxes during 2024. But in the case of a residential property, you would have to wait to claim the ITC until you file your 2025 taxes.

In 2018, the IRS published a notice that provides guidance on an alternative method of demonstrating that you've "commenced construction." Instead of having to physically start installing the solar panel system, the IRS says you can claim the total ITC cost if you've already paid for five percent of the project cost. Most installers suggest a 10 percent deposit so that you have some wiggle room in case the ultimate project cost changes moving forward, but the final result is the same: if you provide a deposit to your installer of five percent or more by the end of the year, you will qualify for the ITC in that tax year.

Notably, in each of these scenarios, there is a limit to how far out you can push the construction – you'll need to complete the project within the next five years or so. But, if your goal is to lock in a higher rate of ITC for a particular tax year and move to install right after the start of the new year, this shouldn't be a problem.

ITC adders

As mentioned above, the IRA changed the tax incentives available to businesses by introducing adders to provide additional tax credits beyond the default 30%. These adders – which are stackable and can each provide up to 10 additional percentage points of tax credits for each project – are not available to residential solar projects unless they are a third-party-owned system (i.e., a lease or a PPA) since the project would technically be owned by a business instead of a homeowner.

As a commercial entity interested in going solar, be sure to check which adders your property and project might be eligible for, and work with your solar installer to ensure the project is designed with those adders in mind.

At EnergySage, we don't just help homeowners go solar–we help businesses explore their solar options, too! When you register for a free account with EnergySage, we'll provide you with an initial estimate of how much solar you need for your business, how much it might cost, and how much you can save with solar. If it looks like a suitable investment for you, we'll gather custom quotes from multiple solar companies in your area and help you decide which is right for your business.