With utilities across the country continuing to raise prices, going solar can be a smart investment for businesses looking to reduce their energy costs and make a positive environmental impact. In addition to the long-term savings on energy bills, businesses can also take advantage of several tax credit options available to those who invest in solar energy systems. The Inflation Reduction Act has provided some incredible incentives that businesses, nonprofits, and local tribal governments can take advantage of. Let's take a look at the solar tax credit options available to businesses, nonprofits, and local tribal governments.

Base Solar Tax Credit

The base solar tax credit, also known as the Investment Tax Credit (ITC), allows businesses to deduct a percentage of the cost of their solar energy system from their federal taxes. As of 2023, the base credit is 30%. This means that if a business installs a solar energy system with a total cost of $100,000, they would be eligible for a tax credit of $30,000.

Domestic Content Solar Credit

The Domestic Content Solar Credit is a bonus credit available to businesses that use solar panels manufactured in the United States. The credit is equal to 10% of the cost of the solar panels used in the system, and it can be combined with the base credit. This means that if a business installs a solar energy system with a total cost of $100,000 using solar panels manufactured in the United States, they would be eligible for a total tax credit of $40,000 ($30,000 from the base credit + $10,000 from the Domestic Content Solar Credit).

Energy Community Solar Credit

The Energy Community Solar Credit is another bonus credit available to businesses that install solar energy systems in low-income communities. The credit is equal to 30% of the cost of the system and can be combined with the base credit. This means that if a business installs a solar energy system with a total cost of $100,000 in a low-income community, they would be eligible for a total tax credit of $40,000 ($30,000 from the base credit + $10,000 from the Energy Community Solar Credit).

Low-Income Solar Credit

The Low-Income Solar Credit is a bonus credit available to businesses that install solar energy systems in low-income areas. The credit is equal to 20% of the cost of the system and can be combined with the base credit. This means that if a business installs a solar energy system with a total cost of $100,000 in a low-income area, they would be eligible for a total tax credit of $50,000 ($30,000 from the base credit + $10,000 from the Domestic Content Solar Credit + $10,000 from the Low-Income Solar Credit).

Chart courtesy of Energy.gov (click to enlarge)

Example of Total Tax Credit

To illustrate the potential tax credit benefits of combining these credits, let's use an example of a business installing a solar energy system with a total cost of $400,000, and meeting the qualifications for the base credit, the Domestic Content Solar Credit, and the Low-Income Solar Credit.

In this example, the base credit would allow the business to deduct 30% of the system's cost from their federal taxes, resulting in a tax credit of $120,000. The Domestic Content Solar Credit would allow the business to deduct an additional 10% of the system's cost from their federal taxes, resulting in a tax credit of $40,000. The Low-Income Solar Credit would allow the business to deduct an additional 20% of the system's cost from their federal taxes, resulting in a tax credit of $80,000.

So, in this example, the total tax credit available to the business would be $240,000, which could be applied to the cost of the $400,000 solar system described in this example reducing the out-of-pocket cost to just $160,000!

Nonprofit Benefits

You may be wondering how tax-exempt organizations like nonprofits, tribal governments, or local municipalities can benefit from these credits. There are two options available to them – direct pay and transfer of credit:

• Direct Pay: The direct pay option allows tax-exempt organizations to receive a refund from the IRS for tax credits on projects.

• Transfer of Credit: Eligible taxpayers who are not eligible for direct payment as well as tax-exempt organizations can also benefit by selling all or a portion of the tax credits for a given year to an unrelated eligible taxpayer.

Of course, with all the various credits, direct pay, and transfer of credit options described throughout this article the best advice is to consult with your CPA, attorney, or other tax professional who can provide you the best guidance on the options available to you for your specific situation. There is also plenty of additional information along with various scenarios available for review on the Department of Energy website here.

Working with a Solar-Friendly Bank

Financing the cost of a solar energy system can be a significant hurdle for many businesses. Fortunately, there are solar-friendly banks that can help. These banks understand the benefits of solar energy and can provide financing options that work well for businesses.

Climate First Bank offers the nation’s best solar loan programs for both commercial and residential customers. We provide an easy application process, and our team of experienced lenders understand the solar system installation process well.  Climate First Bank requires any solar installer they work with to be approved by the bank which means that the installers have been vetted by the expert team at Climate First!

They offer a variety of financing options for businesses and consumers looking to invest in solar energy, including solar loans, energy efficiency construction/renovation loans, and EV charging station finance. You can learn more by visiting www.climatefirstbank.com or emailing the team.

Wrapping Up

Investing in solar energy can be a smart financial decision for many businesses, and tax credits can make it even more affordable. The federal solar tax credit and bonus credits like the Domestic Content Solar Credit, the Energy Community Solar Credit, and the Low-Income Solar Credit can help offset the cost of a solar energy system, making it a more attractive option for businesses, and providing savings in upwards of 60% or more! Additionally, working with a solar-friendly bank like Climate First Bank can provide you with competitive financing options that significantly reduce your out-of-pocket expenses.  

Disclaimer

This article is for informational purposes and 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.

‍