In 2022, Congress passed the Inflation Reduction Act, marking the biggest investment in clean energy in American history. The IRA created bonus incentive credits that lower the costs of investing in renewable energy for businesses, nonprofits, educational institutions, and state, local, and tribal entities. Yes, tax-exempt organizations benefit from the IRA too! We’ll go into how in further detail below.
It’s an exciting time for renewable energy, but details are still in development for commercial property owners looking to go solar. The IRA created these incentives in good faith, but the real-world process of claiming the incentives is still being negotiated between manufacturers, developers, and legislators.
At Exact Solar, we get a lot of questions related to tax incentives for businesses that “go solar.” Like many solar companies, we’re working hard to find clear answers that meet our customers’ needs. Even though the regulations are still being worked out, we’ve put together a high-level overview of these bonus incentives to give you a general idea of the available benefits.
We’ll be updating this page as we learn more, so make sure to stop back in!
Please note that these incentives are very much still being developed and negotiated. What we’ve written below represents what we’ve learned to the best of our knowledge and should not be taken as legal or tax advice.
Tax Credits For Businesses and Nonprofits
There are two different systems in place for claiming the tax credit. Businesses are eligible to claim the Investment Tax Credit, and non-profits and religious organizations claim their incentive through Elective Pay. Both are worth 30% of the total cost of the solar system, and we go into both in more depth below.
On top of the 30% tax credit/elective pay, there are several bonus credits available for businesses that meet certain requirements. We cover those in more depth below!
Organizations that can’t use elective pay can also transfer all or a portion of their tax credit to a third-party buyer in exchange for cash, in a move known as Transferability.
Below is a short summary of the ways that businesses can use these tax credits to their advantage, as well as an overview of the bonus tax credits that the IRA has made available and how businesses can qualify for them!
The Investment Tax Credit
Any business that decides to go solar is eligible to receive a 30% Investment Tax Credit (ITC) on the total price of their system unless their system is larger than 1 MW. Then, the system must meet prevailing wage and apprenticeship requirements to qualify for the 30% tax credit.
Most business owners and nonprofit representatives don’t need to worry about the 1 MW requirement. To put that in perspective, 1 MW is one million watts of solar. It takes roughly 5000 solar panels laid out across 4-5 acres of land to produce that much power. Most commercial installations aren’t that large.
To qualify for the business Investment Tax Credit (ITC), the solar system a business builds must meet the following criteria:
- It must be within the United States or its territories.
- The equipment used must be either new or have limited previous use.
- It cannot be leased to a tax-exempt organization, such as a school (although these tax-exempt entities can directly receive the ITC as a payment through elective pay, as mentioned above). In certain cases, something similar to leases and PPAs can be negotiated as a “service agreement” between both parties.
How to Claim the ITC
The investment tax credit is claimed in the tax year in which the system owner receives permission to operate their solar system.
For example, if a business owner installs their solar system in December of 2024, but the final approval from the utility didn’t come until 2025, then the business owner would have to file for their tax credit with their 2025 taxes and would receive their credit in 2026 (this assumes a January 1-December 31 tax year).
To claim the Investment Tax Credit (ITC), the system owner must complete and attach IRS Form 3468 to their tax return.
The IRS’s instructions for the form detail the specific requirements for various credits, including those for advanced manufacturing and energy projects. For more information, visit one of these two pages:
Elective Pay
Non-profits and religious organizations are also eligible to receive the tax credit. Any non-profit, governmental, or religious organization is eligible to receive 30% of the total system cost as well!
However, since these organizations do not pay taxes, the government gave them a different path to claiming the tax credit.
Elective Pay allows tax-exempt and governmental entities to benefit from clean energy tax credits by making them effectively refundable. Under Elective Pay, the IRS treats the elective payment amount as a tax payment. The organization can then receive the total value of the credit as a refund rather than having to offset it against taxes they owe, as a business would do.
This option incentivizes tax-exempt organizations to invest in clean energy by offering the tax-exempt organization or government entity a direct financial benefit from the tax credit. This money can be reinvested into the clean energy project or used however the organization chooses!
Elective Pay, sometimes called “direct pay,” should not be confused with the IRS’s tax payment method. It involves the IRS treating the credit as a payment, counting it as an overpayment, and then refunding it to the organization.
Entities eligible for Elective Pay include a wide range of tax-exempt organizations like public charities, private foundations, and certain governmental bodies, including state and local governments, Indian tribal governments, and rural electric cooperatives.
How To Claim Elective Pay
Unlike the ITC, which is filed after the system owner receives permission to operate their installed system, Elective Pay must be claimed in the beginning stages of a project initiated by a non-profit.
The IRS has established a pre-filing process for elective payment or transferring the Investment Tax Credit.
To claim elective pay, representatives of tax-exempt entities must first identify and pursue a qualifying project or activity, knowing which applicable credit they intend to earn (i.e., must pursue building a solar system and know that they will claim Elective Pay).
Representatives must complete the pre-filing registration with the IRS, which includes filling out Form 3800. The IRS will then issue a registration number, which must be included in the organization’s tax return.
For more information and detailed instructions, representatives of tax-exempt organizations should refer to the IRS guidelines for Form 3800 as well as Form 3800 itself:
Transferability
Transferability allows companies without sufficient tax burden such as REITs and aren’t eligible for elective pay to transfer these credits to third-party buyers in exchange for cash.
These entities can still benefit financially from their clean energy projects by transferring the tax credits to someone who can use them. The buyer and seller negotiate the terms and pricing of the credit transfer.
A few companies are coming into the marketplace now that handle these transactions as a middleman. Crux Climate is an example.
Transferrable credits include the Energy Credit (48), Clean Electricity Investment Credit (48E), and Advanced Manufacturing Production Credit (45X). The transfer process involves several steps:
- Identifying and completing the eligible project.
- Satisfying all requirements to earn the credit.
- Completing electronic pre-filing registration with the IRS.
- Arranging the credit transfer to the buyer in exchange for cash.
Once registered, the eligible taxpayer must provide the buyer with the necessary documentation and complete a transfer election statement, which is then filed with their tax return.
Buyers must arrange the purchase, obtain the registration number, complete the transfer election statement, and file it with their tax return. The IRS requires detailed information on the transfer election statement, including the names, addresses, taxpayer identification numbers, and credit and cash payment specifics.
The Bonus Tax Incentives Available
Five bonus incentives were created by the IRA that directly relate to lowering the cost of commercial-scale solar projects:
- Energy Communities
- Low-Income Communities
- Domestic Content
- Bonus and Accelerated Depreciation
- Prevailing Wage and Apprenticeship (only applies to projects over 1 MW, so we’ll cover it last).
These tax credits are not mutually exclusive. Theoretically, if a solar developer built a system in a low-income area, on a Brownfield site, built from materials made entirely in the U.S., they’d qualify for a 60% tax credit on the total cost of that installation. This would be very difficult to do, but for those lucky enough to be developing in these Goldilocks zones, it’s a powerful incentive.
It’s important to note that the above incentives apply to commercial-scale solar installations only. If you’re curious about residential solar incentives, you can read more about the residential tax credit on our page for homeowners.
If you’re here to learn about commercial-scale solar, you’re in the right place! Read on, and we’ll go into each incentive in more depth.
Energy Communities Bonus Credit
The Energy Communities Bonus Credit is designed to incentivize developers to build renewable projects in regions that, have historically been economically dependent on fossil fuels or coal that may now be economically depressed. These areas are referred to as “energy communities.”
These energy communities are subject to change based on census data. What qualifies for an additional 10% tax credit one year may not qualify the next. The IRS may remove an area from MSA qualification if unemployment drops, or if something changes in that region.
Criteria for Qualification
To qualify as an Energy Community, a site must meet one of the following criteria:
- Brownfield Sites: Projects located on brownfield sites (properties where the presence of hazardous substances, pollutants, or contaminants may complicate the expansion, redevelopment, or reuse of the property). If you’d like to learn more about Brownfield sites, the Department of Energy has an informative page on the subject.
- Metropolitan Statistical Areas: Metropolitan Statistical Areas (MSAs) or non-Metropolitan Statistical Areas (non-MSAs) with high unemployment rates or significant fossil fuel employment that have been identified based on economic data and specific NAICS codes related to fossil fuel industries.
- Coal Closure Areas: Regions where coal mines or coal-fired power plants have closed after December 1st, 1999, leaving the region economically depressed. Coal closure area measurements affect the regions around them, too. The areas surrounding a closed coal plant could qualify as coal closure areas as well.
Resources:
Energycommunities.gov has more guidance on the subject, as well as an interactive map that includes a list of coal closure communities.
The IRS has an FAQ page on energy communities here for anyone interested.
The Department of Energy, in collaboration with ArcGIS, has published an interactive map that developers can use to see if their potential development site falls on a Brownfield Site, a Statistical Area, or a Coal Closure Area. You can find it here.
We’ve also found an energy community mapping tool here that lays out the potential energy community qualifications for a given development in a checklist once you plug in the address.
How Much Developers Can Claim Back
The amount you can claim back depends on whether your project qualifies for the Production Tax Credit (PTC) or the Investment Tax Credit (ITC). The PTC is based on the total energy produced by the system over time, while the ITC is based on the total cost of the system up front.
The IRS’s page on the difference between the two can be found here, but here’s a summary:
- Production Tax Credit (PTC): Projects in energy communities are eligible to receive a 10% bonus on top of the base PTC.
- Investment Tax Credit (ITC): Projects can receive 10 percentage points added to the base ITC. If the base ITC is 30%, qualifying projects in energy communities can claim up to 40% of the project cost back as a tax credit.
Low-Income Communities Bonus Credit
The Inflation Reduction Act (IRA) introduced the Low-Income Communities Bonus Credit to promote renewable energy investments in low-income communities, American Indian land, and affordable housing developments. Eligible projects primarily include solar and wind energy facilities.
This program offers an additional 10 or 20 percentage point increase to the Investment Tax Credit (ITC) for eligible solar and wind projects but, to qualify, the projects must be built to certain standards in low-income areas.
These projects must either be part of federally subsidized residential buildings, such as those supported by the Low-Income Housing Tax Credit and Section 8, or distribute at least 50% of their total output to low-income households.
Criteria for Qualification
Any project that meets one of the three criteria below below will qualify for this bonus credit:
- Built in Low-Income Areas: Projects must be built in designated low-income communities. These areas typically have a median family income not exceeding 80% of the area median income.
- Built on Affordable Housing: Projects associated with affordable housing developments also qualify. This includes facilities directly benefiting the residents of these housing units.
- Built on American Indian Land: Renewable energy projects on American Indian land are eligible for the ITC as well.
How Much Developers Can Claim Back
10% Increase: Projects installed in low-income communities or on Indian land can receive a 10-percentage point increase on top of the base ITC. For a 10% increase, the total ITC would be 40% (30% base + 10% bonus).
20% Increase: Projects that are part of a qualified low-income residential building or provide economic benefits to low-income households can receive a 20-percentage point increase. For a 20% increase, the total ITC would be 50% (30% base + 20% bonus).
Domestic Content Bonus Credit
The Domestic Content Bonus Credit is designed to encourage developers to use American-made materials in clean energy projects. It provides additional financial incentives for projects that meet specific domestic content requirements. The primary materials covered under this requirement include steel, iron, and manufactured products like microinverters and solar panels.
This one’s a bit tricky because it’s still being negotiated between the U.S. government and manufacturers. The letter of the law, at this point, is that every component in the solar system needs to have been mined, manufactured, and assembled in the U.S.
This means that the silicon used to make the wafers in the solar panels needs to have come out of the ground in the U.S. The transistors and microchips in the inverters need to be entirely U.S.-made. In a global economy, you can see how this gets tricky fast. That’s why manufacturers have been meeting with members of the current administration to try to get these parameters defined.
As of now, there’s no set certification process for someone who’s manufacturing all in the U.S. The industry is holding its breath because whoever can prove that they’re manufacturing entirely in the U.S. first will likely be a market leader.
Until there’s an audit trail and manufacturers are able to prove, beyond a shadow of a doubt, that they’ve made everything in the U.S. and there’s some sort of industry certification, this credit will be very difficult to claim.
How Much Developers Can Claim Back
Projects that meet the domestic content requirements can receive an increased tax credit. Specifically:
- Production Tax Credit (PTC): Facilities eligible for the PTC, like those under Sections 45 and 45Y, can receive an additional 10% credit.
- Investment Tax Credit (ITC): Projects eligible for the ITC, including those under Sections 48 and 48E, can receive an ITC of up to 10%. If the project is eligible for the 30% base ITC, the total ITC would be 40% (30% base + 10% bonus).
Criteria for Qualification
- Steel and Iron: All steel and iron used in project construction must be produced in the United States.
- Manufactured Products: A certain percentage of the total cost of manufactured products used in the project must be attributable to components mined, produced, or manufactured in the United States. The exact percentage required is still being negotiated between manufacturers, developers, and the U.S. government.
Bonus Depreciation
Accelerated Depreciation and Bonus Depreciation
The Inflation Reduction Act (IRA) allows businesses claiming the business solar Investment Tax Credit (ITC) to use an accelerated depreciation schedule. Business owners can now claim greater depreciation expenses in the early years after a solar system’s installation, reducing the overall cost.
Depreciation is considered an expense, so having a larger depreciation amount during the tax year results in a smaller overall tax liability. The accelerated depreciation rules permit the full tax basis minus half of the ITC to be depreciated over a five-year schedule using a half-year convention.
This method effectively spreads the five-year Modified Accelerated Cost-Recovery System (MACRS) depreciation over six years, with the first year calculated as half of the 200% declining balance basis. Stand-alone storage systems are not eligible for five-year MACRS until 2025 but can qualify for bonus depreciation.
Any unused depreciation can be carried forward indefinitely.
Criteria for Qualification
Most taxpayers who claim the business solar ITC can take advantage of the accelerated depreciation schedule.
How Much Developers Can Claim Back
For solar systems installed after 2022, the percentage of equipment that can be expensed immediately decreases by 20% per year: 80% in 2023, 60% in 2024, and so on, until it drops to 0% in 2027.
Prevailing Wage and Apprenticeship Requirements
This incentive only applies to installations larger than 1 megawatt.
For installations larger than 1 MW, the automatic tax credit is 6%, and developers must meet the prevailing wage and apprenticeship requirements to bring it up to 30%. 1MW of solar is roughly two thousand solar panels, so most installations are under 1 MW. If you’re looking to build a solar installation on a parking garage, farm, township, church, etc., your installation will likely be nowhere near 1 MW.
For installations under 1 MW (most installations), the tax credit is 30%.
The Prevailing Wage and Apprenticeship Requirements are designed to ensure that workers involved in clean energy projects receive fair wages and that there is an apprenticeship program in place nationwide to train the future renewable energy workforce.
Credit Amounts
Taxpayers who meet the prevailing wage and apprenticeship requirements can multiply the base amount of their tax incentives by five. This substantial increase applies to various credits, but the most applicable to solar installations are:
- Section 45: Renewable Electricity Production Credit
- Section 45Y: Clean Electricity Production Credit
- Section 48: Energy Credit
- Section 48E: Clean Electricity Investment Credit
Prevailing Wage Requirements
The prevailing wage requirements in the IRA mandate that all laborers and mechanics employed on the construction, alteration, or repair of a qualified facility are paid wages at rates not less than the prevailing rates for similar work in the geographic area.
Apprenticeship Requirements
The apprenticeship requirements consist of three main components:
- Labor Hours Requirement: A specific percentage of the total labor hours must be performed by qualified apprentices. This percentage varies based on when construction begins, typically 12.5% or 15%.
- Ratio Requirement: There must be a certain ratio of apprentices to journey-level workers, as defined by the Department of Labor’s standards.
- Participation Requirement: Contractors and subcontractors must participate in registered apprenticeship programs.
Where Do We Go From Here?
If you’re looking to invest in a solar project, the U.S. government is ready to invest in you. The IRA made it clear that the nation is ready to accelerate the transition to renewable power.
However, since claiming the incentives is still unclear, it’s best to consult with a local installer before making any major decisions. If you’re interested in commercial-scale solar and are planning a project, Exact Solar is here to help ensure that you take full advantage of these incentives.
