ITC for businesses

The 2021 solar tax credit for businesses

The best solar incentive is the federal investment tax credit (ITC). This is true both for home- and business owners: by providing you a credit on your taxes equal to 26 percent of the cost of your solar panel system, the ITC provides a significant benefit to anyone looking to add solar. For the most part, the business solar (and storage!) ITC works nearly exactly the same way as it does for homeowners, with a few key nuances. In this article, we’ll explain what you need to know about the ITC for businesses in 2021. 

Key takeaways

  • If you’re a business owner, you can take advantage of the ITC when installing a solar system, which will provide you with a direct credit on your taxes
  • The business ITC is currently set at 26 percent, but will drop to 22 percent in 2023 and 10 percent in 2024
  • According to the IRS, you can claim the full ITC cost if you’ve already paid for five percent of the project cost–meaning you have some flexibility for when your solar system has to be up and running
  • Your storage system can qualify for the ITC as well, but it has to be charged by a renewable source at least 75 percent of the time; the value of the tax credit is dependent upon how often it is powered by renewable energy
  • If you’re looking to install solar for your business, visit the EnergySage Marketplace to compare quotes from pre-vetted installers

What is the ITC?

Laid out in Section 48 of the US tax code, the business ITC provides an incentive for investing in clean energy by giving you a credit on your taxes equal to a percentage of the cost of your solar panel system. After an update in December 2020, the ITC is 26 percent for solar panel systems installed in 2020, 2021 or 2022, 22 percent for projects installed in 2023, and 10 percent for commercial (but not residential) projects installed after that.

There are only a couple of requirements to be eligible for the ITC: first, you must own your solar panel system–either through an upfront purchase or a loan–and, second, you must have federal tax liability. In other words, if you lease your solar panel system or if you are a non-profit, tax-exempt entity that doesn’t pay taxes to the federal government, you cannot take advantage of the ITC.

We aren’t tax experts!

We certainly know solar and storage, for both homes and businesses, but we recommend talking to your accountant to confirm that these tax benefits can be applied to your own, unique situation. 

How does the ITC work for businesses?

Importantly, the ITC is a tax credit not a tax deduction. However, MACRS and bonus depreciation–two other great incentives that help businesses go solar–reduce your taxable earnings. Here’s what that means in practice, with an example $100,000 solar panel system for a business with $100,000 in taxable income to keep the math simple:

If you have earnings of $100,000 on a 37 percent tax rate, then you’ll pay $37,000 in taxes. Both MACRS and bonus depreciation reduce your taxable earnings, meaning for a $100,000 solar project, bonus depreciation will reduce your taxable earnings by $87,000. So instead of paying taxes on $100,000, you’ll pay taxes on $13,000, meaning you’d owe $4,810 in taxes instead of $37,000 pre-solar. In that way, bonus depreciation provides a benefit while helping you save on what you owe in taxes. 

The ITC, on the other hand, is a direct credit on your taxes: instead of reducing the your taxable earnings, the ITC just is a credit towards what you owe. So with the same example above, and at the current 26 percent rate, the ITC would reduce how much you owe in taxes by $26,000, dropping what you owe from $37,000 to $11,000. 

And the cool thing about it is that, as a business, you can take advantage of both the ITC and bonus depreciation, leading to pretty significant savings from solar.

How much can you save with the businesses ITC? 

The short answer! A lot! The longer answer? It depends! 

The value of the ITC is based on the price of your solar panel system, which is based on how much solar you need and can fit, which is ultimately determined by how much electricity you use and how big your property is. In other words: there are a lot of variables to consider! 

At a high level, the quickest way to approximate how much solar you need is to start with your electricity bill. Find how much electricity you use monthly (in kilowatt-hours, or kWh), and divide that number by 100. Viola! That’s a very rough estimate of the kilowatts (kW) of solar that you’ll need at your property: if you use 4,500 kWh of electricity per month, you’ll need somewhere around a 45 kW solar panel system to offset your electricity usage.

From there, you can take a look at EnergySage data to understand how much solar costs in your state, and multiply that price point by the size of your system. For instance, multiplying $2.75 per Watt by the 45,000 W system gives you $123,750. After that, the math is very simple: for 2021 and 2022, the ITC provides a 26 percent credit ($32,175 for the example above); for 2023, it’s a 22 percent credit; and in 2024 and beyond, it’s a 10 percent credit.

The best way to get a true feel for how much you can save with the solar tax credit, though, is to compare competing solar quotes from high-quality, local providers. We can help you with that

The differences between the residential and business ITC

While the ITC works nearly the same exact way for businesses as it does for homeowners looking to go solar, there are two key differences that can make a big difference in how the ITC works for your business. 

The commence construction / safe harbor clause

With residential solar installations, our general guidance (and what we’ve heard others in the industry say as well), is that to qualify for the ITC in a certain year, a project must both be fully installed and receive its permission to operate from the utility. With commercial installations, on the other hand, there’s the commence construction and safe harbor clause of the ITC, both of which allow you to claim the full ITC for a certain tax year even if you have not yet completed the installation and interconnected it to the grid. 

The commence construction clause states that the construction of the project must have started by the end of the year to qualify under that tax year. In other words, if you’ve started your installation by December 31, 2021, you can claim the full 26 percent ITC when you file your 2021 taxes during 2022. But in the case of a residential property, you would have to wait to claim the ITC until you file your 2023 taxes in this scenario.

In 2018, the IRS published a notice that provides guidance on an alternative method of demonstrating that you’ve “commenced construction”: instead of having to physically start installing the solar panel system, the IRS says you can claim the full ITC cost if you’ve already paid for five percent of the project cost. Most installers suggest a 10 percent deposit so that you have some wiggle room in case the ultimate project cost changes moving forward, but the end result is the same: if you provide a deposit to your installer of five percent or more of the project cost by the end of the year, you will qualify for the ITC in that tax year.

Notably, in each of these scenarios, there is a limit to how far out you can push the construction – you’ll need to complete the project within the next five years or so. But if your goal is to lock in a higher rate of ITC for a certain tax year but move to install right after the start of the new year, this shouldn’t be a problem. 

The ITC for storage

Another important distinction between the residential and commercial ITC is its treatment of storage. For residential properties, when you pair solar with storage, you can claim the ITC on the full cost of the project, inclusive of both the solar and storage costs.

With the business ITC, the rules are a bit more stringent: to claim the ITC on storage installed at a commercial facility, you must charge your battery with a renewable resource (like your solar panels!) more than 75 percent of the time. If you charge your battery with renewables 100 percent of the time, you can claim the full ITC on the cost of the battery. If, however, you occasionally charge it from the grid, that will reduce the value of the ITC you can claim on the battery. 

Explore solar options for your business today with EnergySage

At EnergySage, we don’t just help homeowners go solar–we help businesses explore their solar options too! When you register for a free account with EnergySage, we’ll provide you with an initial estimate of how much solar you need for your business, how much it might cost, and how much you can save with solar. If it looks like the right investment for you, then we’ll gather custom quotes from multiple solar companies in your area and help you decide which is right for your business. 

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About Spencer Fields

Spencer is the Technology & Product Alliance Strategic Lead at EnergySage, where he wears many hats. A 10-year industry veteran (and a solar owner himself!), Spencer spent five years at Synapse Energy Economics before joining EnergySage, providing environmental, economic, and policy analysis for public interest groups. These days, he leads market and consumer intel and research for EnergySage. Spencer has degrees in Environmental Studies and Hispanic Studies from Brown University.