Solar Energy Credits
The recently enacted Consolidated Appropriations Act, 2021 (CAA) addresses solar power, which appears to be a high priority item on the new administration’s agenda. There was an extension of the solar investment tax credit (ITC), which was scheduled to drop from 26% to 22% in 2021 but will now stay at 26% for two more years. This means solar projects in all market segments (residential, commercial, industrial, utility) that begin construction in 2021 and/or 2022 will still be able to receive a tax credit at 26%. All markets will drop to a 22% tax credit in 2023, and the residential market will drop to 0% while the commercial and utility markets will sit at a permanent 10% credit beginning in 2024. However, with the new administration, further legislation is expected in his area.
Why should businesses take note? Many businesses are now using or plan on using solar power to power remote buildings, lights, fencing, pumps, etc. but we are not seeing many credits being claimed by clients.
Overview
Burning coal, oil and natural gas for heat and electricity accounts for roughly 75% of US greenhouse gas emissions. Renewable alternatives, such as geothermal energy, wind power and solar power, reduce the footprint caused by these fossil fuels. The federal solar tax credit is an incentive for commercial and residential use of renewable energy.
The Energy Policy Act of 2005 was the beginning of the federal solar tax credit. The law stated the goal of the act was: "To ensure jobs for our future with secure, affordable, and reliable energy." The new administration has already signaled strong interest in environmental issues by rejoining the Paris Climate Agreement. The solar ITC is one of the federal policy mechanisms to support the growth of solar energy in the United States. Since the ITC was enacted, the U.S. solar industry has grown by more than 10,000%. It created thousands of jobs and billions of dollars of investment in the U.S. economy.
The ITC is a 26 percent tax credit for solar systems on residential homes under Internal Revenue Code Section 25D (Section 25D) and for use commercial under Internal Revenue Code Section 48(a) (Section 48) properties. The Section 48 commercial credit can be applied to both customer-sited commercial solar systems (leased systems) and business locations like large-scale utility solar farms.
The tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential Section 25D and commercial Section 48 ITC are equal to 26 percent for projects that begin construction in 2021 and 2022. It currently will be reduced to 22 percent for projects that begin construction in 2023 and after 2023, the residential credit drops to zero while the commercial credit drops to a permanent 10 percent. Commercial and utility-scale projects which have commenced construction before December 31, 2023 may still qualify for the 26 or 22 percent ITC if they are placed in service before January 1, 2026.
Opportunity
The credits have been mainly claimed on home solar systems (roof tops) and large solar utility farms (acres of solar panels). However, small solar systems also appear to qualify under Section 48 like those used to power isolated locations like storage buildings, pumps, lights and fence lines. A business might ask which costs are included in calculating the credit. Regs. Sec. 1.48-9(d)(3) states, “[s]olar energy property includes equipment that uses solar energy to generate electricity, and includes storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items.” In general, this process involves the transformation of sunlight into electricity through the use of such devices as solar cells or other collectors. However, “solar energy property used to generate electricity includes only equipment up to (but not including) the stage that transmits or uses electricity.” Additionally, "pipes and ducts that are used exclusively to carry energy derived from solar energy are solar energy property." In simple terms, eligible cost would be everything needed to provide power to a well pump but does not include the cost of the pump or the normal wiring to the pump. However, any fencing required to protect the solar equipment would most likely qualify for the credit. Businesses should review their expenditures and segregate the cost related to all solar powered devices to claim an energy credit. You may be surprised by the amount of credit that is available.
Note, if a homeowner buys a newly built home with solar and owns the system outright, the homeowner is eligible for the ITC the year that they move into the house. However, if a homeowner leases the solar system or purchases electricity from the system through a power purchase agreement (PPA), then the ITC is claimed by the company that provides the leased system or offers the PPA.
Summary
The solar energy credit is an often-overlooked overlooked benefit that should be reviewed if these types of expenditures are being made. There are rulings and regulations that clarify what cost are eligible for the credits. The few Section 48 credit clarifications have been dominated by the utility companies and the solar farms. However, as the development of solar power continues to grow for the smaller uses, those uses could generate significant credits worth pursuing. Your tax adviser should be able to help with identifying those credits.