Federal Tax Credits For Solar Panels – This article is part of a series examining the recently passed Inflation Reduction Act, a broad piece of legislation that includes tax reform, health care investments and $369 billion to address the climate crisis. For a broader overview and additional information on the new law, read our article “How the Inflation Reduction Act and Bipartisan Infrastructure Act Are Working Together to Advance Climate Action.”
(IRA) (P.L. 117-169) aimed at combating climate change is the inclusion of $30 billion in clean energy tax credits for resources such as solar and wind power and battery storage. These measures will save American families more than $1,000 a year on their utility bills, helping many people reduce their high energy burdens, and will help the United States reduce carbon emissions by 40 percent by 2030 and meet its clean energy goals. According to the US Department of Energy, the clean energy credits found in the IRA and those in the
Federal Tax Credits For Solar Panels
The IRA modifies and extends the Production Tax Credit (PTC) and Investment Tax Credit (ITC) for 10 years and creates a new “direct payment” option (applicable to both). The PTC is a tax credit given primarily for wind energy production at a qualifying facility during the first 10 years of operation. The ITC is a flat tax credit that is claimed by the solar energy producer or homeowner when the solar field becomes operational. Both credits are currently worth 26 percent of total installation costs.
No Free Solar Panels Federal Government Program Exists
Before the IRA, only homeowners and commercial entities with certain tax liabilities could claim tax credits when installing solar panels, wind turbines or other eligible technologies on a property or qualified facility. Now, the “direct payout” option means that non-taxable entities can also benefit from these loans. And credits are now available for other zero-emission technologies, such as geothermal energy, nuclear power generation, carbon dioxide sequestration and clean hydrogen production.
The PTC and ITC was created by Congress more than 40 years ago and is set to drop to 22 percent for homeowners over the next few years. Instead, the IRA gives back the full value of both tax credits at 30 percent through 2033, which homeowners with tax liabilities can claim immediately. Clean energy tax credits remain available to commercial entities until 2025. After 2025, solar and wind producers will have to meet prevailing wage requirements to claim the full value of the tax credit.
The IRA also creates a new tax credit (also 30 percent and convertible to a point-of-sale rebate) for a stand-alone battery with more than three kilowatt-hours of storage capacity in residential units. Storage devices with a capacity of less than one megawatt are also eligible for the Clean Electricity Tax Credit. This new battery tax credit could radically transform the solar and clean energy industries by providing a significant incentive to install distributed battery storage to strengthen the electric grid.
Following the expansion of the ITC and PTC, solar capacity is projected to quadruple and wind capacity is expected to nearly double by the end of the decade. With the greater penetration of intermittent renewable energy, this means there is a greater need to provide short- and medium-term energy storage to support the grid. And a new tax credit for battery storage may help boost distributed stand-alone batteries. The expansion of clean energy tax credits could not have come at a better time. Faced with higher electricity prices, homeowners are also turning to solar power to reduce their overall grid energy use. As a result, residential panel installations are expected to jump to a record 5.6 gigawatts in 2022, enough to power more than one million average American homes annually.
Federal Solar Tax Credit
The IRA allows tax-exempt entities, such as nonprofit organizations such as houses of worship, rural electric cooperatives, municipalities, tribal governments, and municipal utilities, to cash in the full value of the ITC or PTC and receive payment from the Treasury Department instead of claiming the credit on their taxes. This “direct pay” option is a game-changer because it will give nonprofits access to the same financial incentives that for-profit companies get when they invest in renewable energy. The ability to claim a 30 percent rebate on solar and community solar projects will allow nonprofits to offer lower-cost, cleaner electricity options to communities, which is especially important for communities that have historically suffered from air pollution and other health and environmental burdens. . Non-profit organizations can avail a 30 percent point-of-sale discount for installing rooftop solar panels and battery storage devices, as batteries will also be eligible for the point-of-sale ITC credit next year.
Previously, tax-exempt organizations could not access the 26 percent federal tax credit or the matching wind tax credit because they had no tax liability to use them. Instead, they had to rely on financial structures, such as power purchase agreements (PPAs), Clean Power Program rated commercial properties, or solar leases. Through these programs or agreements, nonprofits could partner with private companies with the necessary tax liability to seek credits, opening the door for nonprofits to finance renewable energy projects—usually solar. Essentially, the solar panels are owned by a third party, not a non-profit organization. These proprietary third-party programs are not legal in every state. For example, PPAs are only available in 29 states plus the District of Columbia and Puerto Rico. These financial solutions add complexity and time and require financial knowledge that not every nonprofit may have. This puts nonprofits at a disadvantage compared to well-capitalized companies and prevents them from investing in clean energy.
Importantly, in order to take advantage of the full value of the tax credit, clean energy projects commissioned after December 31, 2022, will have to be 1 megawatt or smaller. Otherwise, they will need to meet a number of prevailing wage and apprenticeship requirements to claim the full value of the tax credit. If these conditions are not met, the developer will only be able to claim six percent of the tax credit instead of 30 percent. In addition, there are tax credit bonuses for clean energy projects that meet domestic content and workforce requirements and those located in environmental justice communities (i.e. communities most affected by environmental damage) and “energy communities” ” (ie communities that have historically been highly dependent on the fossil fuel industry or with above-average unemployment rates).
Under the IRA, the direct payment option for solar and battery storage is only available to tax-exempt organizations, not households. This wrinkle in the law continues to make access to solar credits and rebates difficult for tax-exempt households—often low-income households. Still, the direct payment option, long sought by non-profit organizations, is welcome. It presents an opportunity for non-profit organizations to install solar panels and share the benefits with their communities. For example, places of worship are increasingly installing solar panels and battery storage to increase resilience so they can withstand power outages due to severe weather and provide shelter for those who lose power.
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Many details of the new law, including the monetization of tax credits for tax-exempt entities, still need to be worked out by the agencies charged with implementing it. In the next few months, the Ministry of Finance will have to provide guidance on how these organizations can claim a point-of-sale discount instead of tax credits.
The direct payment option for the federal Clean Energy Tax Credit is also a big win for rural electric cooperatives (cooperatives), which are nonprofit organizations owned by the people they serve. There are more than 860 rural electric cooperatives nationwide, supplying electricity to more than 40 million Americans and covering about two-thirds of the country’s land mass. In the last decade, cooperatives have increasingly invested in renewable energy sources to replace fossil fuel infrastructure as clean energy prices have fallen. However, about 50 percent of the energy that cooperatives supply to homes and businesses comes from fossil fuel plants. Only 22 percent of the energy produced in the community comes from renewable energy sources.
One bright spot in co-generation of renewable energy is solar or small, moderate-sized community solar projects that are jointly owned or subscribed to by several individuals or organizations. Historically, co-ops, due to their tax-exempt nature, have not had access to the federal Clean Energy Tax Credit. Despite this obstacle, cooperatives have been adept at building community solar arrays for their members over the past decade. Since 2010, cooperatives have built hundreds of megawatts of community solar across the country, more than what larger companies have developed in utility-owned distributed energy. With the direct payment option for federal loans, cooperatives can invest in more solar arrays in the community, spurring economic development in rural areas and creating good jobs.
Allocates $9.7 billion in loans and grants through September 2031 for energy investments “for the long-term resilience, reliability and affordability of rural electricity systems.” Eligible investments include renewable energy systems, energy efficiency measures and other zero-emission production aimed at reducing greenhouse gas emissions. This big down payment on rural energy use comes with a few caveats. First, only up to 10 percent of the total funds (or $970 million) can be used.
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