There are two tax credits available for businesses and other entities like nonprofits and local and tribal governments that purchase solar energy systems (see the Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics for information for individuals):

  • 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.[1]
  • The production tax credit (PTC) is a per kilowatt-hour (kWh) tax credit for electricity generated by solar and other qualifying technologies for the first 10 years of a system’s operation. It reduces the federal income tax liability and is adjusted annually for inflation.[2]

Solar systems that are placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC or a 2.75 ¢/kWh[3] PTC if they meet labor requirements issued by the Treasury Department[4] or are under 1 megawatt (MW)[5] in size.

Solar Investment Tax Credit (ITC)

The ITC is a tax credit for businesses that install a commercial solar energy system. According to the Inflation Reduction Act of 2022, businesses can claim a 30% tax credit for their solar installation until 2032. In 2033 and 2034, the credit for commercial properties will drop back to 26%.

The ITC grants a solar installation tax credit with no yearly maximum. If your business cannot use the credit in the year that you earn it, you can carry it forward for up to five years.

Production Tax Credit (PTC)

The PTC is a federal tax credit available to business owners who install a qualified solar energy system. It’s a credit for your solar energy system’s energy production and is currently $0.026 per kWh. It will adjust each year with inflation, so it’s essential to take advantage of it sooner rather than later. You can receive either the ITC or the PTC for your commercial solar installation.

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The Inflation Reduction Act turned the clean energy tax credits into a formula rather than a straight tax credit.

ITC 30% for solar, geothermal, and battery storage projects becomes the “base credit.”

PTC is on a kilowatt-hour (kWh) basis, the base credit under IRA is 2.75 cents per kWh.

The IRA established additional bonus credits that can be stacked on top of the base credit if certain conditions are met.

These bonuses are:

Domestic Content

Energy Community

Low-Income Community

6 Potential Bonus Credits:

The ITC includes six different bonus credits that projects may apply for.

The ITC includes two additional 10% credits, which are stackable. Projects who are eligible can apply for both bonus credits, in addition to the 30% baseline credit and one of the bonus credits within the Low-Income Communities Bonus Credit Program.

The two stackable bonus credits (§ 48) are:

  • 10% bonus Energy community (map shows eligibility) 
  • 10% bonus Domestic Content requirements

Low-Income Communities Bonus Credit Program has Four credits for projects housed within the mapped areas.

The four bonus credits within the Low-Income Communities Bonus Credit Program are:

  • 10% bonus for projects located in a low-income community (map shows eligibility) 
  • 10% bonus for projects located on Tribal Land
  • 20% bonus for projects when the facility is part of a qualified low-income residential project
  • 20% bonus for projects when the facility is part of a qualified low-income economic benefit project

Projects can only apply for one of the four bonus credits within the Low-Income Communities Bonus Credit Program. This means a project could either receive a 10% or 20% bonus credit, depending on their eligibility.

Energy Community Tax Credit Bonus Eligibility Map https://arcgis.netl.doe.gov/portal/apps/experiencebuilder/experience/?id=a2ce47d4721a477a8701bd0e08495e1d

Low-Income Communities Bonus Credit Program Eligibility Map

https://experience.arcgis.com/experience/12227d891a4d471497ac13f60fffd822/page/Page/

Stacking Grants With Tax Credits

Domestic Content Bonus

Projects that meet domestic content minimums[17] are eligible for a 10 percentage point increase in value of the ITC (e.g., an additional 10% for a 30% ITC = 40%) or 10 percent increase in value of the PTC (e.g., an additional 0.3 ¢/kWh for a 2.75 ¢/kWh).

The required percentage of manufactured products starts at 40% for all projects beginning construction before 2025, increases to 45% for projects beginning construction in 2025, 50% for projects beginning construction in 2026, and 55% for projects beginning construction after 2026.[18]

On May 12, 2023, IRS issued guidance on the domestic content bonus. Within the guidance, the IRS provides a non-exhaustive list of solar PV steel products, manufactured products, and components of manufactured products, which taxpayers may rely on for classification purposes. These include:

  • Steel/Iron products: steel photovoltaic module racking; pile or ground screw; steel or iron rebar in foundation (e.g., concrete pad)
  • Manufactured products: PV module; PV tracker; inverter
  • Components of a PV module (if applicable): photovoltaic cells, mounting frame or back-rail, glass, encapsulate, back-sheet, junction box (including pigtails and connectors), edge seals, pottants, adhesives, bus ribbons, and bypass diodes.

Domestic Content Bonus

The following example, adapted from the 2024 IRS guidance, illustrates how to calculate the domestic content percentage for a project using the elective safe harbor method:

  • A ground-mounted PV system has three manufactured products — PV modules, inverters, and PV trackers – and two steel/iron structural components — steel piles, and steel rebar in foundation.
  • Both the steel piles and steel rebar are manufactured in the United States. The PV system meets the steel and iron requirements of the domestic content bonus.
  • The PV modules have 11 manufactured product components: the cells, frame/backrail, front glass, encapsulate, backsheet/backglass, junction box, edge seals, pottants, adhesives, bus ribbons, and bypass diodes. In this PV system, the modules are manufactured in the United States and all of the components except for the cells are also manufactured in the United States

Eligible Expenses for ITC

What expenses are eligible for the ITC?

While the PTC is calculated based on the electricity produced by a system, 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;
  • CSP equipment necessary to generate electricity, heat or cool a structure, or to provide solar process heat;
  • 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
  • For projects 5 MW or less, the tax basis can include the interconnection property costs spent by the project owner to enable distribution and transmission of the electricity produced or stored by the system—this can include costs that are incurred beyond the point at which the energy property interconnects to the distribution or transmission systems

The cost of a roof installation is generally not eligible, except for incremental costs, or the amount over what you would have spent if the roof was not used for solar.[11]

These costs could include solar shingle, solar tiles, or the incremental cost of installing a reflective roof membrane that increases electricity generation.

STRUCTURES AND BUILDING-INTEGRATED PV

Structures holding the solar PV system may be eligible for the ITC if the solar PV system is designed with the primary goal of electricity generation and other uses of the structure are merely incidental.[12]

Though structural components typically do not qualify for the ITC, the IRS noted an exception for components “so specifically engineered that it is in essence part of the machinery or equipment with which it functions.”[13] ‑Therefore, building-integrated PV, like solar windows, shingles, or facades, which provide a dual function are eligible for the ITC.

CARRYBACK AND CARRYFORWARD RULES

Unused tax credits related to the project may be carried back three years and forward 22 years for projects placed in service in 2023 or later (projects placed in service before 2023 can carry the tax credits back one year and forward 20 years). After 20 or 22 years, one-half of any unused credit can be deducted, with the remaining amount expiring. Tax credits carried backward or forward are not eligible for “transferability” (i.e., cannot be sold).

RECAPTURE RULES

Though the ITC can be claimed in full for the year in which the solar system is placed in service, the business claiming the ITC must retain ownership of the system until the sixth year of the system’s operation, or the business will be required to repay a portion of the tax credit.

Because the ITC “vests” at a rate of 20% per year over five years, any “unvested” portion is recaptured (i.e., repaid to the IRS if something happens during the five years that would have made the project ineligible for the ITC in the first place. For example, if the business claims the ITC and then sells the system a year later, after it has only vested 20%, it will have to repay 80% of the amount it claimed from the ITC to the IRS. PTCs are not subject to recapture. If the tax credit has been transferred, the buyer bears the responsibility for recapture.[49]

Nonprofits and ITC

Nonprofits can benefit from the Investment Tax Credit

The ITC can now benefit Nonprofits and other tax-exempt entities, not only businesses that have tax liability.

Congress expanded the ITC in three crucial ways:

1) Nonprofits with no tax liability can now apply for direct pay reimbursement equal to the value of the tax credit

2) Storage-only projects are now eligible for the ITC.

3) The ITC now includes several ‘bonus credits’, which can significantly increase savings for projects serving low-income and underserved communities.

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