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Federal Solar Tax Credits for Business

The federal solar tax credit, also known as the investment tax credit (ITC), allows a business or organization to deduct 30 percent of the cost of installing a solar energy system from federal taxes, for systems installed by December 31, 2019.

First placed into law through the Energy Policy Act of 2005, the rules were significantly changed in 2016 and renewed in 2018. Residential and commercial solar energy systems are subject to different credits in the future. For businesses, the ITC reaches a minimum of 10% at the start of 2022 and for every subsequent year. The scheduled reductions are as follows:

Maximum Solar Electric Tax Credit

  • 30% for systems placed in service by 12/31/2019
  • 26% for systems placed in service after 12/31/2019 and before 01/01/2021
  • 22% for systems placed in service after 12/31/2020 and before 01/01/2022
  • 10% for systems placed in service after 01/01/2022

Qualifying For and Using the Federal Tax Credit

When you own your solar energy system, you are automatically eligible for the solar tax credit. Even if you don’t have enough tax liability to claim the entire credit in the first year, you can “roll over” the remaining credits. When a third party owns the system, they receive the corresponding credit.

A change allowed with recent updates, the program no longer requires a system to be fully operational to qualify within a tax year. The most recent legislation allows the system owner to claim it as soon as the construction of the system is complete, as long as it is operational by December 31, 2023.

Valid expenditures subjected to the credit include labor costs for on-site preparation, assembly or original system installation, and for conduit or wiring to interconnect a system to the home. A reputable solar installer will note exactly what charges are eligible.

There is no limit on the credit that can be applied to the system owner’s applicable taxes. However, state incentives can be more restrictive and limit the sizing of a residential solar energy system. For more details visit the Massachusetts Commercial Solar Incentives and Rhode Commercial Island Solar Incentives pages.

Modified Accelerated Cost-Recovery System (MACRS)

The IRS defines a solar energy system to be eligible for an accelerated 5 year depreciation cycle. The total capital amount or basis depends on the use of the Investment Tax Credit (ITC). When a business or organization uses the 30% ITC, an accelerated 5 years depreciation is allowed on 85% to the qualifying capital costs. Without using the ITC, a full 100% of the capital costs can be subjected to the MACRS. See IRS Details on MACRS.

The Federal Tax Credit Future

It is difficult to predict whether the U.S. Congress will consider a future extension to the ITC policy at any point. However, the current credit schedule highlights the importance of acting quickly to maximize your benefits, if possible. For example, making a solar power investment in 2020 results in a loss of 4% in tax credit value. For a 250 kW commercial solar energy system in Massachusetts and Rhode Island, that could translate to $15,000 in savings or more left behind… or not in your bank account.

Massachusetts – Rhode Island State Tax Incentives

Find out additional tax incentive programs offered in Massachusetts and Rhode Island:

Massachusetts State IncentivesRhode Island State Incentives 

The Federal Tax Credit Future

It is difficult to predict whether the U.S. Congress will consider a future extension to the ITC policy at any point. However, the current credit schedule highlights the importance of acting quickly to maximize your benefits, if possible. For example, making a solar power investment in 2020 results in a loss of 4% in tax credit value. For a 250 kW commercial solar energy system in Massachusetts and Rhode Island, that could translate to $15,000 in savings or more left behind… or not in your bank account.

Massachusetts – Rhode Island State Tax Incentives

Find out additional tax incentive programs offered in Massachusetts and Rhode Island:

Massachusetts State IncentivesRhode Island State Incentives