Solar, The Investment Tax Credit – Part 1

Investment Tax Credits (ITC) have been around since 1962. ITCs were created by Congress to help stimulate the economy and to protect domestic businesses from foreign competition. The types of renewable energy property available for the ITC are, but not limited to, solar, geothermal, fuel cell, microturbine, small wind, waste energy, and biogas. A more detailed listing of energy property and the credit calculation can be found in Internal Revenue Code (IRC) §48 – Energy Credits.

The most talked about and most popular renewable energy property right now is solar. Qualifying “solar” energy property is defined as equipment which uses solar energy to generate electricity, heat or cool a structure, provide solar process heat, or to illuminate the inside of a structure.

For the solar energy property to qualify for the investment tax credit, it must meet three other requirements.

• The solar project must be located in the United States of America or a U.S. Territory, and
• The project must use new equipment or limited used equipment, and
• The solar project cannot lease the property to a tax-exempt entity.

What are some of the tax benefits of solar projects?

Investment Tax Credit:

• A nonrefundable credit that allows taxpayers (individuals, C corporations, estates, and certain trusts) to generally offset Federal taxes dollar-for-dollar. Because it is a nonrefundable credit the taxpayer cannot reduce their tax liability below zero. Any unused investment tax credits in the current year can be carried forward 20 years for use or carried back one year.
  • Partnerships & S Corporations – these types of entities are deemed passthrough entities and do not directly pay Federal taxes. Therefore, the ITCs would be passed out to the partners & shareholders to use on their tax return.
• The credit is calculated by multiplying the applicable base rate against the eligible property cost. The base rate is determined by the tax year the solar project is placed in-service. The current base rate can be as high as 30%.
• The Inflation Reduction Act (IRA) ushered in a couple of other key tax benefits. Please see my follow up blog on key changes to the investment tax credit for more details.
  • Two additional 10% bonus rate(s) if additional requirements are met.
  • The ability to buy and sell investment tax credits.

Depreciation:

• Eligible solar ITC property is considered 5-year tangible property for Federal MACRS depreciation. This means an entity can take accelerated depreciation (double declining, etc.), bonus depreciation under Section 168(k), and/or Section 179 expensing.
• The additional depreciation expense can help reduce the taxable net income or possibly create a taxable net loss in the year the solar project is placed in-service.
• The depreciable basis for tax reporting is decreased by one half of the investment tax credit received when determining the depreciable basis of the property.

As with other things in life, especially from Congress and the IRS, some things are too good to be true. I do want to be clear. The investment tax credits a taxpayer can receive from solar and the additional depreciation are great tax benefits. But there are other ancillary Internal Revenue Codes that can reduce or delay when the benefits are received by the taxpayer.

Part 2 of this blog will focus on the Revenue Codes that taxpayers need to be aware of when contemplating the installation of a solar project and how those codes can impact the benefits received. I will also outline non-Revenue Code items that taxpayers should keep in the back of their mind as well.

This has been a general overview of the solar investment tax credits for commercial taxpayers. If you would like more details on the solar investment tax credit and its application, please contact a Mahoney tax advisor to help answer your questions. See you in my follow up blog.

By Brent Buchman
Associate Director – Tax