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Apr 19, 2024

Solar Benefits for Small Businesses

Businesses have much to gain from the incentives of the
Inflation Reduction Act. Subject to where solar projects are installed, the equipment used and the end Borrower, the payback period for some solar systems can be measured in months instead of years.

Incentives can be broken down into three primary categories: (1) Federal and state-level tax credits, (2) Federal, state or utility-based rebate programs, and (3) depreciation benefits.

Federal and state-level tax credits 

Federal and state-level tax credits were extended through the Inflation Reduction Act. Through 2033, businesses across the country can benefit from a 30% investment tax credit (ITC) for installing solar and storage systems on premises. Rather than the ITC, companies can also opt to utilize production tax credits (PTC) that generate potential benefit for the business based on the production of the system rather than the installed cost of the system as with the ITC. Due to the complexity of the PTC calculation, it is generally utilized to a lesser degree. However, the PTC can yield a higher return for project owners in many cases. The PTC can often provide greater potential in areas where construction costs are relatively low and the resource opportunity is high (i.e. where the sun shines a lot). 

The IRA created a number of bonus credits to the ITC and PTC (outlined below) that provide additional incentives for renewable energy development within, for and from certain communities. Outlined below, bonus credits are typically additive:

  • In an effort to create value within the US manufacturing industry, the IRA added a 10% benefit for businesses if materials are made and sourced from within the United States. To meet the criteria of the Domestic Content Bonus, iron and steel products must be 100 percent made in America (meeting “melted and poured” standard for steel) and at least 40 percent of the total costs of all manufactured products and their components in land-based clean energy projects or facilities must be mined, produced, or manufactured in the US. To meet this criteria in full, manufacturing stakeholders must also meet guidelines for prevailing wages and registered apprenticeships. Though this benefit is significant, many major component and materials manufacturing companies produce materials overseas and have not yet met these requirements, which means the 10% Domestic Content Bonus is not yet widely available. 
  • Additional bonus tax credits exist for small-scale projects (< 5 MW) placed into production within low-income communities meeting certain criteria, known as the Low Income Communities Tax Credit. Low income residential buildings are eligible for an additional 20% tax credit while facilities located in a low-income community are eligible for an additional 10% tax credit. For businesses in these areas, a 10% bonus should be assumed. 
  • Energy communities can qualify for an additional 10% tax credit. For purposes of the IRA, energy communities are either 1) brownfield sites (referring to mine-scarred land or land that has the presence of potential hazardous substances, pollutants or contaminants), or 2) “statistical areas” that have an unemployment rate at or above the national average for the previous year, and 0.17% or greater direct employment, or 25% or greater tax revenues, related to the extraction, processing, transport or storage of fossil fuels, or 3) a census tract in which a coal mine has closed recently. 

While the base 30% tax credit is compelling, bonus credits can make opportunities increasingly attractive for many projects, especially those in economically depressed areas or geographies with labor markets largely serving the prevailing fossil fuel industry. Knowing which credits your small business can benefit from, and whether the ITC or PTC is the preferred path subject to your location, the size and cost of your system, is an essential first step in weighing the opportunity to invest in an energy system. Technical assistance is available through various tax and professional services companies.  

Federal, state or utility-based rebate programs

In addition to the tax credits themselves, rebates (direct cash repayment) are sometimes available at the federal, state and sometimes the regional or utility level. Consulting an expert with local knowledge to your geography and business model is always recommended so extra money isn’t left on the table. Many renewable energy system developers and installers will have a strong working knowledge of these programs as well. 

One of the most prominent national programs is offered by the US Department of Agriculture through its Rural Energy for America Program (REAP). This program was expanded considerably as part of the Inflation Reduction Act. The most intriguing aspect of the Rural Energy for America Program is that it provides direct grant funds (rebates) rather than tax credits so it bypasses a borrower’s requirement to have a tax liability. REAP grants are available by application, but are limited to agricultural producers and rural small businesses. 

REAP grants can cover up to 50% of the total eligible project costs up to $1,000,000 for renewable energy systems, or $500,000 for energy efficiency systems. As REAP grants are awarded based on application, businesses are not guaranteed to receive all or even a portion of the funds. The USDA guides interested businesses to consult a Rural Development Energy Coordinator to gain further information before applying. 

To qualify for a REAP grant, projects must be created in rural areas as defined by the USDA. They’ve published a useful online tool to help determine eligibility and an interactive map to better understand where funds have gone to date.

Depreciation Benefits

All commercial businesses can benefit from accelerated depreciation models available for solar and electrification projects. The Modified Accelerated Cost Recovery System (MACRS) allows customers to accelerate the depreciation (using the double-declining balance method) of the project investment over a five (5) year timeframe rather than the anticipated useful life of the asset, which is typically 25 years in the case of a solar system. Pursuant to IRS guidelines, the borrower must reduce the tax basis of the project by ½ of the value of the tax credit. For projects taking the standard investment tax credit of 30%, the cost basis of the solar project is 85% of the cost for depreciable purposes. 

Similar to a tax credit, the increased depreciation expense reduces the tax burden for companies in the year the benefit is realized. However, unlike the tax credit which provides a dollar-for-dollar reduction of a company’s tax liability, the MACRS system reduces income prior to computing a business’s tax liability. Over the 5-year period, and assuming a federal tax rate of 21%, MACRS depreciation generally provides borrowers an additional monetary benefit equal to 17.85% of the solar project. 

Business Tax Credits are Transferable  

The three noted categories are not the only means by which companies can benefit from installing solar. Commercial tax credits are transferable so that businesses can realize an immediate cash infusion (or payback) for a significant portion of their initial investment. If all or some of the system is financed, the transferable tax credit, if realized, can immediately generate a positive return on investment (ROI). This characteristic is unique to businesses (individuals do not have the ability to transfer their tax liability). Marketplaces are growing to help facilitate the transfer.

Final Thoughts 

Between the base tax credit and MACRS depreciation, small businesses receive a monetary incentive of 47.85% of the cost of the solar system (30% tax credit + 17.85% MACRS depreciation), recouped during the first five years of the project. Additional bonus tax credits or federal, state or regional grants can increase the immediate benefit of investing in a solar project. Businesses in rural areas that can take advantage of the REAP grant of 50% of project costs, for example, would recoup 97.85% of the investment within the first five years. Businesses that don’t have a large tax liability can still benefit by claiming bonus depreciation and transferring the tax credit. 

Combined with lower energy bills without regular rate hikes makes going solar a sound investment for many small businesses. For more information regarding credits and deductions for businesses under the IRA, visit the IRS.

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