Commercial Tax Benefits For Solar Panels in California

How Does the California Solar Tax Credit Work?

Businesses looking to install solar panels in California may be relieved to learn that there are multiple tax incentives available to help alleviate the installation cost.

Our team at TENCO SOLAR works hard to stay updated about the investment tax credits (ITC) and other tax incentives available to business owners in California. We’re here to help you navigate the solar finance process so you can take advantage of all available tax incentives.

TENCO SOLAR does not provide tax or accounting advice. This material has been prepared for informational purposes only and is not intended to provide nor should it be relied on for tax or accounting advice. You should consult your own tax, legal, and accounting advisors regarding your specific circumstances.

If you need a solar expert to help you reap available tax benefits for your project, look no further than TENCO SOLAR. Contact us at 888-507-6937 to get started.

Investment Tax Credit

There are two tax credits available for businesses and nonprofit organizations that purchase solar energy systems:

• The Investment Tax Credit (ITC) is a tax credit equal to 30% of the cost of a solar panel system that’s installed during the tax year.
• The Production Tax Credit (PTC) is a 2.6 ¢ per kilowatt-hour (kWh) tax credit for electricity generated by solar and other qualifying technologies for the first 10 years of a system’s operation. It reduces federal income tax liability and is adjusted annually for inflation.

In most cases, you cannot claim the ITC and PTC for the same property. However, depending on what additional guidance is issued from the IRS, it may be possible to claim both credits for solar and storage systems located on the same property.

Solar panel systems that are placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC or a 2.6 ¢/kWh PTC if they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW) in size.

The renewable energy PTC is available until the end of 2024, after which the PTC will transition to a technology-neutral credit.

Which Solar Projects Are Eligible For The ITC Or PTC?

• Located in the U.S. or U.S. territories
• Use new and limited previously used equipment
• Placed in service in 2022 or later and begin construction before 2033
• Not leased to a tax-exempt entity
• Are under 1 megawatt (MW) in size OR meet labor requirements issued by the Treasury Department

Which Tax Credit Is Right For My Project?

Whether to choose the ITC or the PTC largely depends on the total cost of the project, the amount of sunlight available, and whether your project is eligible for any bonus tax credits.

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What Are The Labor Requirements For Projects Over 1 MW (AC)?

On Nov. 30, 2022, the Department of the Treasury and the IRS published Notice 2022-61 (the “Guidance”) describing how to satisfy specific prevailing wage and apprenticeship requirements (the “PWA Requirements”) for purposes of obtaining the full credit amounts for the Section 45 production tax credit (“PTC”) or the Section 48 investment tax credit (“ITC”).

To qualify for the full ITC or PTC, projects must meet the Treasury Department’s labor requirements:

• All wages for construction, alteration, and repair must be paid at the prevailing rates of that location.
  • For the first five years of the project for the ITC and the first 10 years of the project for the PTC
• A percentage of the total construction labor hours must be performed by an apprentice.
  • 12.5% for projects beginning construction in 2023.
  • 15% for projects beginning construction after 2023.

Energy from solar and other eligible projects will be paid a base credit of 0.3 ¢/kWh, with a fivefold higher credit of 1.5¢/kWh paid to projects that are built with workers paid a prevailing wage that has undergone apprenticeship requirements.

The Treasury Department’s labor requirements are waived for solar projects with a net output below 1 MW.

What Are Bonus Credits?

In addition to the ITC or PTC, a project can qualify for additional or bonus tax credits.

Note: We’re still awaiting final guidance from the U.S. Department of Treasury on the requirements for the Adders described below.

Domestic Content Adder

To qualify:

1. 100% of steel or iron used in structural components (canopies, racking systems, mechanical attachments) must be produced in the U.S.
2. A “required percentage” of the manufactured products (PV electrical components, like modules, MLPEs, inverters, and switch gear) used need to be mined, produced, or manufactured in the U.S.
   • 40% for all projects beginning construction before 2025.
   • 45% for projects beginning construction in 2025.
   • 50% for projects beginning construction in 2026.
   • 55% for projects beginning construction after 2026.

Projects that meet these qualifications are eligible for:

• 10%-point increase in the value of the ITC (30% -> 40%)
• 10% increase in the value of the PTC

Low-Income Adder

• For placing the project in a low-income area (per the census tract)
• Only available to projects using the ITC and is subject to a 1.8 GW program cap per year
• Projects that are under 5 MW qualify for either:
  • 10%-point increase in value of the ITC for being in a low-income community as defined by the New Markets Tax Credit or on Indian land (30% -> 40%)
  • 20%-point increase in value of the ITC for being classified as a “qualified low-income residential building project” or “qualified low-income economic benefit project.” To qualify, the financial benefits of the solar project must be allocated equitably between the residents. (30% -> 50%)
• Projects must be completed within four years after receipt of the allocation.

Energy Community Adder

To qualify, the facility must be in:

• A brownfield site
• A metropolitan or non-metropolitan statistical area, which:
  • has, or had at any time since 2010, 0.17% or more direct employment or 25% or more local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas, AND
  • had an unemployment rate above the national average in the previous year
• A census tract, or an adjoining census tract, in which a coal mine was closed after 1999 or a coal-fired electric generating unit was retired after 2009

The Department of the Treasury and IRS have partnered with the Interagency Working Group on Energy Communities to provide a searchable mapping tool that helps identify areas that may be eligible for the energy community bonus.

Projects that meet these qualifications are eligible for:

• 10%-point increase in the value of the ITC
• 10% increase in the value of the PTC

For more information on the Energy Community Adder, please visit our article on the Energy Community Tax Credit Bonus, or How to File for the ITC Bonuses.

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When Do The ITC & PTC Phase Out?

As they’re currently written, the ITC, PTC, and associated bonuses will begin to phase out in 2032 or after there has been a 75% or greater reduction in annual greenhouse gas emissions from the production of electricity in the U.S. as compared to 2022 (whichever is later).

How Can Tax-Exempt Organizations (Nonprofit & Government Entities) Benefit?

Organizations that don’t pay federal taxes, like nonprofits or local governments, can take advantage of the tax credits through:

• Direct pay: A refund from the IRS for tax credits on projects placed in service after 2022. Projects that begin construction in 2024 and are 1 MW or above must meet domestic content requirements to receive the full refund.
• Transfer of credit: Taxpayers who aren’t eligible for direct payment may sell all or a portion of the tax credits for a given year to an unrelated eligible taxpayer. Additional information on the transfer credit program can be found on the IRS website.

What Does “Commence Construction” Mean?

Based on the most recent guidance from the IRS, a solar project is considered to have commenced construction if:

• At least 5% of final qualifying project costs are incurred. Expenses must be “integral” to generating electricity, and equipment and services must be delivered (or anticipated to be delivered within 3.5 months after payment); or
• “Physical work of significant nature” is commenced on the project site or on project equipment at the factory. Physical work must be “integral” to the project. Preliminary activities on-site (e.g., clearing the site or building a fence or an access road) do not count as “integral.”

The IRS requires that a project make continuous progress toward completion once construction has begun, which the IRS considers automatically satisfied if the project is placed in service no later than four calendar years after the year in which construction began. See our article on Safe Harbor provisions to learn more about requirements.

Comparison Of ITC & PTC With Bonus Depreciation

The following provides a summary of the tax benefits associated with choosing either the ITC and depreciation or the PTC and depreciation for a utility-scale PV system.

What Happens To Unused Tax Credits?

Carryback & Carryforward Rules

Unused tax credits related to the solar project may be carried back three years and forward 22 years for projects placed in service in 2023 or later.

Tax Equity Financing

If a business doesn’t have a large tax liability, the business can partner with a tax equity investor who can use the tax benefits. While solar developers can now transfer tax credits, a tax equity investor may help them take advantage of accelerated depreciation.

Bonus Depreciation

The Tax Cut and Jobs Act of 2017 modifies bonus depreciation to allow bonus depreciation deductions for property placed in service before Jan. 1, 2027.

• After Sept. 27, 2017, through 2022: Eligible for 100% bonus depreciation
• 2023: Eligible for 80% bonus depreciation
• 2024: Eligible for 60% bonus depreciation
• 2025: Eligible for 40% bonus depreciation
• 2026: Eligible for 20% bonus depreciation

State (CA) Modified Accelerated Cost‐Recovery System (MACRS)

Under the Modified Cost Recovery System (MACRS), businesses may recover investments in certain properties through depreciation deductions. The MACRS establishes a set of class lives for various types of property over which the property may be depreciated.

Discover the future of sustainable energy for your commercial property by contacting TENCO SOLAR at 888-507-6937 today.