New Commercial Solar Tax Incentives

There are two tax credits available for businesses and other entities like nonprofits and local and tribal governments that purchase solar energy systems.  This article will focus on the Investment Tax Credit as it is more applicable to our commercial solar customers nationwide.  The investment tax credit (ITC) is a tax credit that reduces the federal income tax liability for a percentage of the cost of a solar system that is installed during the tax year.  There is no cap to the ITC, meaning whether your solar system costs $500,000 or $5,000,000 your entity will potentially be eligible to receive up to 60% of the cost of the system as a Federal tax credit!  We will discuss these new commercial solar tax incentives or “adders” that can potentially increase your organization’s ITC from 30-60% below:

Energy Community Bonus

An energy community is one of three things:

1. a brownfield site – specifically, a site that has been contaminated by the presence of a hazardous substance, pollutant, or contaminant (excluding petroleum), including certain mine-scarred lands;[20]
2. an area that, after 2009, had a 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 has an unemployment rate at or above the national average for the previous year; or
3. a census tract in which a coal mine closed after 1999 (including any adjoining census tract), or a coal-fired electric generating unit has retired after 2009.

Projects sited in an energy community are eligible for a 10-percentage-point increase in value of the ITC (e.g., an additional 10% for a 30% ITC = 40%) or 10 percent increase in value of the PTC.[21] For more information, please see Treasury’s most recent guidance and their map.

Low Income Bonus

The low-income bonus is only available to projects using the ITC and is subject to a 1.8 GW_dc program cap per year. This bonus provides projects that are under 5 MW_ac either:

1. an additional 10% ITC for being located in a low-income community as defined by the New Markets Tax Credit[22] (Category 1) or on Indian land (Category 2); or
2. an additional 20% ITC for being classified as a “qualified low-income residential building project”[23] (Category 3) or “qualified low-income economic benefit project”[24] (Category 4). To qualify for the credit, the financial benefits of the solar facility must be allocated equitably between the residents.

The 1.8 GW program cap will be allocated to projects by the IRS, which can carry over any unused annual allocation for three years.

For 2023, the IRS has proposed to allocate capacity according to the following table.

There will be a 60-day application period (no application date has been announced), after which a rolling application process will remain open if a category is under its allocation, and a lottery process will be used in categories that are over their allocation. Priority will be given to applications meeting certain ownership and location criteria.[25] Other priority criteria are also under consideration by IRS and Treasury but have not been confirmed. Only the owner of the project can apply; projects cannot apply to more than one category; and artificially dividing up projects to be below the 5 MW_ac cap is not allowed.

Projects must be completed within four years after receipt of the allocation and cannot be placed in service prior to receiving an allocation. There are also strict requirements on what (if any) changes to project size, location, ownership, and benefits distributions are allowed after allocation.[26]

For more information, please see Treasury’s most recent guidance for 2023

The Inflation Reduction Act increased the availability of commercial solar tax incentives to large organizations.

Domestic Content Bonus

To qualify for the domestic content bonus, all structural steel or iron products[16] used must be produced in the United States and a “required percentage” of the total costs of manufactured products (including components) of the facility need to be mined, produced, or manufactured in the United States. The percentage is calculated by dividing the cost of all domestically manufactured products and components by the total cost of all manufactured products.

Projects that meet domestic content minimums[17] are eligible for a 10 percentage point increase in value of the ITC (e.g., an additional 10% for a 30% ITC = 40%).

The required percentage of manufactured products starts at 40% for all projects beginning construction before 2025, increases to 45% for projects beginning construction in 2025, 50% for projects beginning construction in 2026, and 55% for projects beginning construction after 2026.[18]

On May 12, 2023, IRS issued guidance on the domestic content bonus. Within the guidance, the IRS provides a non-exhaustive list of solar PV steel products, manufactured products, and components of manufactured products, which taxpayers may rely on for classification purposes. These include:

• Steel/Iron products: steel photovoltaic module racking; pile or ground screw; steel or iron rebar in foundation (e.g., concrete pad)
• Manufactured products: PV module; PV tracker; inverter
• Components of a PV module (if applicable): photovoltaic cells, mounting frame or backrail, glass, encapsulant, backsheet, junction box (including pigtails and connectors), edge seals, pottants, adhesives, bus ribbons, and bypass diodes.

The May 12 guidance also provides more clarity on how to classify a product as either domestic or a non-U.S. manufactured product, which will help to determine if a project qualifies for a domestic content bonus. According to the new guidance, the total cost of a manufactured product is only classified as domestic if it was manufactured in the United States and all its components are of U.S. origin. It does not, however, consider the origin of its subcomponents. For example, PV cell origin is considered because they are a component of a PV module, but the origin of the PV wafer used to produce the PV cell is not considered. If the product—or one or more of its components—was manufactured or mined outside the United States, then the product is considered a “non-U.S. manufactured product.” Only the cost of its domestically manufactured or mined components can be included for purposes of meeting the domestic content bonus requirements, but not the labor to manufacture the product.

The guidance also states that only the direct costs, as defined in § 1.263A-1(e)(2)(i), that are paid or incurred by the manufacturer to produce the manufactured product can be included in the calculation. Direct costs are defined as direct labor costs and direct material costs,[19] but do not include any indirect costs incurred by the manufacturer such as electricity, depreciation, repairs and maintenance, overhead, and profit (i.e., direct costs do not include all the costs incurred to produce a product and most likely do not represent the price of a manufactured product paid by the taxpayer).

The following example, adapted from the IRS guidance, illustrates how to calculate the domestic content percentage for a project:

• A PV system has two manufactured products, both manufactured in the United States: Manufactured Product 1 and Manufactured Product 2 (see Table below).
• Both components of Manufactured Product 1 (Component 1A and 1B) are produced in the United States. The total cost of Manufactured Product 1 is $100.
• Manufactured Product 2 has three components, but only Component 2A and 2B are produced in the United States. Component 2C is produced internationally. The total cost of Manufactured Product 2 is $200, but together, Component 2A and 2B are $80.
• The total direct cost of Manufactured Product 1 & 2 is $300.
• The total direct cost of domestic manufactured products and components is $180. That includes all of the costs of Manufactured Product 1 ($100) because all of its components are of U.S. origin, and the direct costs of Component 2A & 2B ($80).
• The domestic content percentage of this project is therefore 180/300, or 60% and therefore would satisfy the adjusted percentage rule.

Direct Costs of Manufactured Products 1 and 2

A taxpayer must submit to the IRS a statement certifying that each applicable project for which the taxpayer is reporting a domestic content bonus credit amount meets the steel, iron and manufactured product requirements and must keep records substantiating the assertion.

This guidance is valid until 90 days after the date of publication of forthcoming proposed regulations on domestic content (no publication timeline for future regulations was provided).

As this blog’s purpose is to give an overview of new commercial solar tax incentives provided by the Inflation Reduction Act we are not covering Federal or state depreciation.  For more information on those incentives read our previous blog on commercial solar tax incentives https://www.beachcitiessolarconsulting.com/commercial-solar-tax-incentives/.

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This blog provides an overview of the federal investment tax credits for businesses, nonprofits, and other entities that own solar facilities. It does not constitute professional tax advice or other professional financial guidance and may change based on additional guidance from the Treasury Department.  Please consult a licensed tax professional regarding your organizations specific situation as we are not tax advisers.