Solar Investment Tax Credit
One of the most popular programs is the Solar Investment Tax Credit (ITC). Most people are familiar with these for residential purposes (done under IRC Section 25D), however, there is also a commercial ITC under Section 48.
The ITC is calculated based on the amount that was spent on eligible expenses times a credit rate. Eligible expenses include the Solar photovoltaic panels and related components (racking, inverters), installation costs, transformers, circuit breakers, and energy storage devices. The credit is earned the year the system is placed in service. If the construction began before 2020, the credit amount would be 30% of the cost. For projects that started in 2020 through 2022, the credit percentage would go to 26%. For projects started in the upcoming 2023 year the amount drops to 22%, and in 2024 the credit amount drops to 10% and will continue at 10%, barring any changes from congress.
In addition to the credit itself, the solar panels also are depreciation eligible. Solar panels are considered 5-year property by the IRS and is subject to depreciation. The basis (or value) for depreciation is reduced by 50% of the ITC claimed. As 5 year property, it can either be depreciated using a straight line (20% per year for 5 years), MACRS (which accelerates the depreciation in year 2 and reduces year 3-5), or bonus depreciation – which is currently at 100% in year 1 for 2022 and dropping to 80% in the year 2023.
Beyond one’s use in their own property, a contractor should also be aware of these credits for any projects they are currently working on. A new construction or rehabilitation project can provide an opportunity to install these eligible units and help to unlock value for the project sponsor. Having a knowledge of this will certainly give contractors an edge. Additionally, much like other tax credits (Low Income Housing Tax Credit), there are funds that are looking to monetize these credits by providing investment into solar projects that generate these credits for high-net-worth individuals or corporations as a form of tax equity financing. While there may some obstacles to utilizing these credits, the estimated yield is between 7-16% and shows that these projects may be here to stay.
Plug-in electric cars have become more popular over the past decade. Originally somewhat a novelty, nearly all manufacturers offer various electric cars and have expanded past the compact models to various sizes, including many commercial vehicles. Various government programs in different states and at the federal level are pushing for electric vehicles by 2030 to compose the majority of new cars. It has been estimated that an electric vehicle would save somewhere between $2,000 – 4,000 per year in fuel costs (obviously dependent on miles driven, the type of vehicle, and driving patterns). Further, there is a potential tax credit available for purchases of these vehicles.
The Plug-In Electric Vehicle Credit is offered under IRC Section 30D and allows for a credit of up to $7,500 for the purchase (not lease) of a new electric vehicle. In order to unlock the full value of the credit, the car must be purchased before the manufacturer reached its 200,000th sale and produce a certain amount of its propulsion energy (based on kilowatt-hours) drawn from battery capacity. For vehicles purchased after the 200,000 goal is reached, each period after the tax credit gets reduced by half and then ultimately phases out. For the first 2 quarters, after this goal is reached, the full credit is reduced from $7,500 to $3,750, and then to $1,875 for the next 2 quarters until fully phased out. A listing of the available credit for each make and model is available here.
Much like the ITC, this credit is a dollar-for-dollar reduction of federal tax liability. The credit is claimed on Form 8936 and would either offset federal income tax (for a corporation) or personal income tax (for a pass-through entity owner). Some proposals in 2021/2022 called for a major overhaul to this credit, including limiting the claim based on the income of the purchaser; however, to date, these have not yet passed.
Other Credits and Incentives
While the above 2 programs are the most prevalent programs on the federal level for tax credits, other programs have existed in the past. These programs are often enacted for short periods of time and then continually renewed as part of the “extenders” tax packages. These have included the IRC Section 30C Alternative Fueling Property Credit (expired 2021) and biofuel-related credits. These often find a way to pop back up retroactively. There was also a renewed focus on new credits in recent proposed (but not enacted legislation), making this a continually evolving area.
As contractors, taking advantage of tax credits is important to your business and can provide a boost for “going green.” Knowing which EVs would give you the most tax credit or if you should begin that solar panel construction is important to obtaining the most credits for your investment. As the years progress, the tax credit will dissipate, initiating these projects and investments now will benefit you the most now.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.
Tom is a member of Cerini & Associate’s tax staff which provides services across a variety of industries including healthcare, construction, retail, manufacturing, service, and technology.