Businesses seeking to reduce their carbon footprint, streamline their energy costs, and reduce their dependence on the local power supply have gotten a boost from the federal government that will increase the cost-effectiveness of switching to solar power.
In 2022, Congress passed and the President signed legislation that, among many other things, renewed and revitalized the solar Investment Tax Credit (ITA) for commercial and residential solar installations. Since a federal solar tax credit was first enacted in 2006, the solar industry has tripled in size, bringing zero-emissions energy, hundreds of thousands of jobs, and increased energy independence to the U.S.
In its simplest form, companies installing solar can earn a 30% tax credit to offset the upfront costs. That helps reduce the time solar takes to pay for itself, usually in the 4 – 8-year range, leaving most of a solar array’s 25-year life span to produce power at almost no cost. Incentive credits can be piled on top of that to boost the tax credits towards 50%, for example: buying domestically manufactured equipment or siting the project in a community historically impacted by the fossil fuel industry (such as coal mining).
Suppose your business didn’t earn enough income to claim the full credit in the first year: the law allows you to carry it over to future years.
In addition, many states offer their solar tax incentives that can be piggybacked onto the federal credit. For example, solar projects in Maryland have a sales tax exemption on equipment and businesses can earn a personal property tax abatement for building rooftop community solar systems that benefit mostly low-income subscribers. South Carolina provides a 25% income tax credit on the cost of a solar energy system, which is separate from the ITC. Combined, state and federal incentives can produce significant cost savings for businesses, allowing more to access green energy and independence from the grid.
Craig Knowlton, vice president of business development at Alder Energy Systems in Charleston, SC, says most businesses achieve significant energy savings but will tap into the grid on cloudy days and at night. “Some of your power will still come from the utility company, depending on how much you use and how big of a system you can install,” he says.
If your system produces more power than your building needs, the excess goes back to the grid through a bidirectional meter, and the utility company gives you credit for that electricity. You should enjoy a net financial benefit from using the sun’s free rays, even if your business periodically pulls power from the utility.
“On a very sunny day in the spring, when you’re not using a lot of power, most solar energy production is exported back to the grid and building up credit. At night, you work off the credit you built up during the day,” Knowlton says.
How can a business benefit from the tax credits?
Let’s sketch out how the credits might affect your business financially.
Consider a company with a solar array that, with all the attendant hardware, costs $200,000 to install and produces enough power to reduce the utility bill by $25,000 annually. It would be paid off after eight years and provide 17 years of savings. This is a simplification, of course, but you can see how it produces nearly half a million dollars in savings over its life.
Now add the ITC, which provides a 30% tax credit, reducing reportable net income by $60,000. Add state tax incentives and depreciation of the asset, then knock a few more years off the payback schedule. The tax breaks alone aren’t sufficient reason to go solar; they’re a thumb on the scale of considerations. For more information, we’ve discussed the financial benefits of solar energy and how you can take advantage of them for your business.
Great news about the phase-out
The federal credits are designed to phase out beginning in 2032 or when annual greenhouse gasses from the production of U.S. electricity are reduced by 75%, whichever is later.
Let’s be realistic: the credits will not phase out for decades, if ever. Even the most optimistic projections don’t foresee a reduction that size by any year. That means these tax credits will be available to businesses for many years to come as long as the ITC and PTC remain the law.
Interested in capitalizing on the new solar tax credits? Contact an Alder Energy solar expert today!