financial incentives: the solar investment tax credit

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In a big win for business owners who are interested in adopting solar power, the Inflation Reduction Act (IRA) was passed in August of 2022 (H.R. 133) and as part of this stimulus package legislation, the Solar Investment Tax Credit (ITC) was modified and extended. In most cases, for a typical solar energy system, these incentives allow you to achieve immediate savings in your electricity costs and deliver a return on investment (ROI) of less than five years.

The Solar ITC provides an attractive federal tax credit at a minimum of 30% and applies to a wide range of businesses, including farms, office buildings, warehouses, manufacturing operations, distribution centers and more. Additionally, the United States Department of Agriculture's Rural Energy for America Program (REAP) grants offer financing and funding to agricultural producers and rural small business owners to purchase or install solar energy systems.

Key highlights of the bill include:

• The Investment Tax Credit (ITC) has increased to 30% for businesses and homeowners who install solar until 2032 (If you installed solar in 2022 and were expecting a 26% credit, you can now claim the 30% credit instead).
• The 30% ITC will remain effective until 2032, then decrease to 26% in 2033 and 22% in 2034.
• Location of the project (i.e. in economically distressed areas or energy communities) and domestic content of components can potentially increase the ITC by 10% or 20%.
• Solar battery storage installations are now eligible for a 30% credit.
• Nonprofits, schools, and municipalities who previously were not able to benefit from the ITC, are now eligible for Direct Pay where the federal government will reimburse 30% of the solar installation cost, providing certain requirements are met. Direct Pay can potentially increase by 10% or 20% if the project is located in economically distressed areas.
• The Rural Energy for America Program (REAP) has been expanded to assist farms and rural small businesses in adopting solar energy with loans and grants.
• Starting in 2023, commercial customers can transfer their credits to another commercial entity for monetary benefits without needing to exceed the cost of the ITC.

To further clarify, the Inflation Reduction Act provides a tax credit valued at 30% (or more) of the total cost of your solar power system. A solar investment tax credit  operates differently from tax rebates and deductions. Unlike a rebate, which provides a refund, a tax credit reduces the income tax you owe by the same dollar amount, and any remaining credit can be carried over to the next year. 

In addition to the Federal Income Tax Credit, there may be additional solar incentives at the state, county, city, or town level in your area.