How Does the Federal Solar Tax Credit Work for Businesses?

The federal solar tax credit, known as the Investment Tax Credit (ITC), is a very real and powerful incentive for businesses to invest in renewable energy. This is not a scam. There are no tricks. It’s the law. In this article, I’ll explain how federal solar tax credits work for businesses, who is eligible, what they cover, and additional benefits such as the production tax credit (PTC), accelerated depreciation, and USDA REAP Grants.

The Investment Tax Credit (ITC) has made solar power viable and desirable for small businesses.

So, what are the numbers here? The ITC is a direct cash payment to businesses that covers 30% of the cost of solar energy systems—and that 30% applies to more than hardware, which I’ll explain later.

Does that mean you should go out and get a solar system right now? Not necessarily. As we continue, just keep in mind that a dollar is a dollar; we may get money back come tax season, but big expenses affect cash flow. The upside is that when a business sports a solar system, it is perceived as sophisticated (the panels are visible from the street). There is absolutely a case for brand building, especially for doctors, lawyers, high-dollar retailers, and corporate offices.

As of 2023, the ITC is set at 30% and has been extended through the mid-2030s by the Inflation Reduction Act (IRA).¹ ²

Businesses must meet specific criteria to qualify for the federal solar tax credit.

Solar systems must be located within the United States, and the components used to build them must be new—at least a majority of the components. Businesses must pay for solar installation and materials with cash or through financing, so if your business chooses to pay through a lease or power purchase agreement, you’ll be eligible to claim the credit.³ ⁴ ⁵

Yes, the ITC refunds 30% of solar panels, labor, and storage.

The simplest way to think about the ITC is that it covers the essential parts of a solar PV system. “Essentials” qualify as the following:

• Solar panels, inverters, wiring, and mounting hardware.
• Labor costs for installation, including permitting fees, inspection costs, and developer fees.
• Energy storage systems rated 3 kilowatt-hours (kWh) or more (like the Tesla Powerwall, which has a base model of 13.5 kWh).⁶ ⁷

Various solar incentives like state-level tax breaks, rebates, and net metering can further boost your savings. These vary by state, so be sure to work with a local company that knows the full extent of funding support your business is entitled to.

The Production Tax Credit (PTC) provides ongoing benefits for electricity generation.

The PTC is an entirely different form of tax credit than the ITC. The PTC rewards businesses with cash payments based on the amount of electricity their systems generate over time.

Because of the way solar tax credits work for businesses, you can use the ITC to cover upfront costs of solar installation, then take advantage of the PTC to earn ongoing tax credits for the electricity you sell back to the power companies.

Accelerated depreciation significantly reduces the upfront cost of solar installation.

An accelerated depreciation schedule means businesses can claim deductions in the early years of an asset’s life, so, in the case of federal solar tax credits, you can depreciate the full tax basis minus half the ITC over a period of just five years. From that point, you’re free to carry forward any unused depreciation indefinitely.⁸

Remember that depreciation is a business expense, so accelerated depreciation means your business gets to shave off a greater share of its taxable income in the first five years.⁹

USDA REAP Grants provide additional financial support for solar projects.

Businesses in rural areas should apply for the USDA Rural Energy for America Program (REAP) Grant because it can cover up to 50% of the installation costs for your solar system—with up to $1 million in funding available.¹¹ Both the ITC and REAP Grants significantly reduce the overall investment in solar energy systems.

Leverage the ITC and other incentives to maximize your business’s tax savings.

If you’re ready to explore how these tax benefits can work for your business, let’s connect. Schedule a discovery call today.

Talk soon,
Jeremy A. Johnson, CPA

1. IRS. Investment Tax Credit (ITC) for Energy Property. Available at: https://www.irs.gov/pub/irs-pdf/p5886.pdf
2. Energy.gov. Federal Solar Tax Credits for Businesses. Available at: https://www.energy.gov/eere/solar/federal-solar-tax-credits-businesses
3. IRS. Instructions for Form 3468. Available at: https://www.irs.gov/pub/irs-pdf/i3468.pdf
4. IRS. Form 3468. Available at: https://www.irs.gov/pub/irs-pdf/f3468.pdf
5. Boston Solar. Can I write off solar panels for my business? Available at: https://www.bostonsolar.us/solar-blog-resource-center/blog/can-i-write-off-solar-panels-for-my-business/
6. Tesla. How Powerwall Works. Available at: https://www.tesla.com/support/energy/powerwall/learn/how-powerwall-works
7. Boston Solar. What Does the Inflation Reduction Act Mean for Commercial Solar Installations? Available at: https://www.bostonsolar.us/solar-blog-resource-center/blog/what-does-the-inflation-reduction-act-mean-for-commercial-solar-installations/
8. Commercial Solar Guy. Commercial Solar Depreciation Explained. Available at: https://commercialsolarguy.com/commercial-solar-depreciation-explained/
9. IRS. Energy-Efficient Commercial Buildings Deduction. Available at: https://www.irs.gov/credits-deductions/energy-efficient-commercial-buildings-deduction
10. Better Buildings Solution Center. Federal Solar Tax Credits Businesses Guide. Available at: http://betterbuildingsolutioncenter.energy.gov
11. EnergySage. USDA REAP Grants for Solar. Available at: https://www.energysage.com/business-solutions/solar-tax-credit-for-businesses/