The solar tax credit can help make new solar projects financially viable for your company. These upgrades can provide long-term energy cost savings for your business, but often involve large up-front payments. Claiming the solar tax credit can provide tax savings to ease the burden of the initial outlay.
This guide explains the solar tax credit for businesses, which expenses qualify, and how to claim the credit.
What is the Solar Tax Credit?
The solar tax credit offers a dollar-for-dollar reduction in federal tax liability.
Internal Revenue Code (IRC) Sections 48(a)(3)(i) and 48(a)(3)(ii) grant businesses a tax credit for solar equipment as part of the energy credit. The energy credit, in turn, contributes to the investment tax credit. Finally, the investment tax credit comprises part of the general business credit.
The general business credit can only offset tax liability. However, any unused portion can go against tax from the prior year and up to twenty future years.
The amount of the solar tax credit equals a percentage of the cost of eligible property—called solar energy property—placed in service during the year. This percentage varies according to the year construction began:
- 30% in 2019 or earlier.
- 26% in 2020-2022.
- 22% in 2023.
- 10% in 2024 or later—0% for fiber-optic solar energy property.
The credit automatically drops to 10% if your business doesn't start using the solar equipment before January 1, 2026.
The IRS considers construction begun when “physical work of a significant nature" starts. This test looks at all the facts and circumstances surrounding construction of the property. Alternatively, the IRS deems the requirement met after your company incurs at least 5% of the final project costs.
Continuous construction progress must occur under either of the above tests. The IRS usually considers this requirement met if your company begins using the property within a certain number of years after starting construction. The exact number of years has varied, especially due to the pandemic, and as of this article the IRS has not extended this provision to construction began in 2021 or later.
What Qualifies for the Solar Tax Credit?
Solar energy property uses solar energy to generate electricity, regulate a building's temperature, or provide hot water to a building. This excludes passive solar like greenhouses.
Examples of solar energy property include:
- Solar panels and related equipment.
- Batteries and other energy storage—if charged at least 75% by renewable energy.
- Related electrical equipment.
Sales taxes, installation, and some indirect labor count towards the cost of solar energy property.
Fiber-optic solar energy property—which uses solar energy to light a building with natural sunlight—also qualifies for the solar tax credit. However, the credit for this type of property expires earlier, as noted above.
Property fails to qualify as solar energy property if used equipment comprises more than 20% of the total cost. Heating a swimming pool automatically disqualifies property.
How to Claim the Solar Tax Credit
Report the solar energy property your business began using during the year on line 12b, 12c, or 12d—depending on when construction began—of Form 3468. The investment credit, once calculated on Form 3468, then goes on Form 3800, Part III, line 4a. Form 3800 computes the business credit, which for individuals flows to Schedule 3 of Form 1040.
Make sure not to confuse the solar tax credit for businesses and the residential solar tax credit. The residential credit operates under similar but not identical rules. Form 5695 calculates the residential solar tax credit as part of the nonbusiness energy property credit. The nonbusiness energy property credit then goes on schedule 3 of Form 1040.
The solar tax credit offers significant tax savings. The credit percentage reduces after 2022, so plan now to secure maximum savings for your business.