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Solar rebate explained. We aren’t tax experts!

Solar rebate explained. We aren’t tax experts!

    Solar rebate explained

    Who wouldn’t like to cut down their energy cost? A safe guess is no one. Switching to solar energy is the perfect way for businesses and homeowners to lower their electricity bills, yet many are hesitant in taking the leap due to installation costs. This is where federal incentives, including solar rebates and tax credits come in.

    The cost of installing solar PV systems has dropped significantly over the past decade due to continuous developments in solar technology. However, the lack of skilled labor and difficulties in securing permits means installation cost remains a major hurdle in switching to solar energy. Add to that the slowdown faced by the industry over the past year due to the pandemic, switching to solar would not have been a viable option for many. So, how will things change this year?

    solar, rebate, explained

    (Note: This blog will only discuss trends that would affect solar PV installations in residential and commercial sectors.)

    Federal Incentives and Solar Rebates

    As part of its plan to reduce reliance on fossil fuels and oil for generating electricity, the government is pushing both residential and commercial sector to fulfill their energy requirements by installing solar PV systems. Over the past decade, the US government has introduced several incentives, including solar rebates and tax credits to encourage people who want to switch to solar energy.

    Despite last year’s economic slowdown, federal incentives and rebates allowed residential and commercial consumers to switch to solar power. According to Energy Sage, home solar installation increased by 7% in 2020. Apart from a reduction in of solar equipment, incentives offered by federal government, states and other authorities including municipalities and utility companies also played a role in the reported increase.

    At the end of last year, the government decided to maintain the federal solar rebate — or the investment tax credit (ITC) — at 26% instead of reducing it to 22%. The incentive will enable people to save up to 26% of the total installation cost. The 26% rebate will stay in place until the next two years, after which the rate will come down to 22%.

    Simplifying Solar Permits

    One discouraging factor for businesses and homeowners who are looking to switch to solar energy is the complicated process of obtaining a permit. According to the Solar Energy Industries Association (SEIA), the painstaking process of obtaining a permit can add up to 7,000 to the installation costs.

    This year, the government has plans to digitize the process by introducing the Solar APP (Solar Automated Permit Processing). The online platform will help streamline the process by enabling authorities to conduct an instant review of solar installation plans, give immediate feedback to installers without having to personally visit the site in order to inspect the project. Through the

    online platform, concerned authorities can run compliance checks to ensure installation procedures are in accordance with the rules.

    According to the Solar APP website, the platform integrates with the existing official software, allowing authorities to conduct an automated review of installation plans, track projects, approve permits and verify installation checklists.

    Increased Funding and Friendly Measures

    The solar industry may also see a boom under the current Biden administration that is striving to extend federal tax credits and provide funding to underserved communities who find it economically unfeasible to switch to clean energy.

    The government might also remove tariffs imposed on solar panels by the previous administration, which is expected to help the solar industry boom.

    An increase in solar installations is also expected after the extension of the 26% investment tax credit granted by government late last year. Added incentives like net metering, solar renewable energy certificates (SREC) and performance-based incentive (PBI). Depending on where they live, consumers may be able to avail added benefits offered by states and utility companies on solar installation.

    Key takeaways

    Laid out in Section 48 of the US tax code, the business ITC provides an incentive for investing in clean energy by giving you a credit on your taxes equal to a percentage of the cost of your solar panel system. As a result of the Inflation Reduction Act in 2022, the ITC was reset to 30% and extended for the next decade at least. However, while it’s easy to capture the 30% tax credit in 2023 and 2024, there are a few more criteria to meet in order to hit the full 30% tax credit in 2025 and beyond for larger commercial projects over 1 MW.

    Two other important things to note: first, after 2025, the continuation of the ITC for commercial systems will depend on whether the solar and electric sectors meet the U.S Department of Treasury’s goals of reaching a 75 percent reduction in emissions below 2022 levels.

    And, second, a commercial project can also be eligible for additional credits beyond 30% if it meets certain criteria:

    • 10% if 40% of the manufactured components were produced in the U.S.
    • 10% if the project is located in an energy community, meaning it has brownfield sites or coal plant closures.
    • 10% if the project is less than 5 MW in capacity and is located in a low-income community or tribal land.
    • 20% if the project is less than 5 MW and is installed as part of a low-income residential building project or economic benefit system

    How the Inflation Reduction Act changes solar tax credits for businesses

    We certainly know solar and storage, for both homes and businesses, but we recommend talking to your accountant to confirm that these tax benefits can be applied to your own, unique situation.

    Importantly, the ITC is a tax credit not a tax deduction. However, MACRS and bonus depreciation–two other great incentives that help businesses go solar–reduce your taxable earnings. Here’s what that means in practice, with an example 100,000 solar panel system for a business with 100,000 in taxable income to keep the math simple:

    If you have earnings of 100,000 on a 37 percent tax rate, then you’ll pay 37,000 in taxes. Both MACRS and bonus depreciation reduce your taxable earnings, meaning for a 100,000 solar project, bonus depreciation will reduce your taxable earnings by 87,000. So instead of paying taxes on 100,000, you’ll pay taxes on 13,000, meaning you’d owe 4,810 in taxes instead of 37,000 pre-solar. In that way, bonus depreciation provides a benefit while helping you save on what you owe in taxes.

    The ITC, on the other hand, is a direct credit on your taxes: instead of reducing the your taxable earnings, the ITC just is a credit towards what you owe. So with the same example above, and at the current 30 percent rate, the ITC would reduce how much you owe in taxes by 30,000, dropping what you owe from 37,000 to 7,000.

    And the cool thing about it is that, as a business, you can take advantage of both the ITC and bonus depreciation, leading to pretty significant savings from solar.

    How much can you save with the businesses ITC?

    The short answer! A lot! The longer answer? It depends!

    The value of the ITC is based on the price of your solar panel system, which is based on how much solar you need and can fit, which is ultimately determined by how much electricity you use and how big your property is. In other words: there are a lot of variables to consider!

    At a high level, the quickest way to approximate how much solar you need is to start with your electricity bill. Find how much electricity you use monthly (in kilowatt-hours, or kWh), and divide that number by 100. Viola! That’s a very rough estimate of the kilowatts (kW) of solar that you’ll need at your property: if you use 4,500 kWh of electricity per month, you’ll need somewhere around a 45 kW solar panel system to offset your electricity usage.

    From there, you can take a look at EnergySage data to understand how much solar costs in your state, and multiply that price point by the size of your system. For instance, multiplying 5000.75 per Watt by the 45,000 W system gives you 123,750. After that, the math is very simple: for 2023, the ITC provides a 30 percent credit (37,125 for the example above).

    solar, rebate, explained

    Tax Incentives for Solar Power

    When governments want to motivate the use of solar power, a very common solution is reducing the tax burden for photovoltaic technology. Alternatively, governments may introduce tax benefits for homes and businesses that go solar. The two most common types of tax benefits are exemptions and credits.

    Tax Exemptions

    A tax exemption for solar power consists of removing a tax that would normally apply. This reduces the ownership cost of solar panel systems, motivating their use by homeowners and businesses. The following tax exemptions are applied by many states in the US:

    • Sales tax exemption : When you purchase a solar power system, the sales tax is not charged. This essentially acts like a discount, making solar panels easier to afford.
    • Property tax exemption : Since building improvements increase value, they raise the corresponding property tax. However, many states have decided not to apply taxes for any increase in property value that comes from solar panels.

    Tax Credits

    A tax credit is a reduction of your tax burden, which is granted as a reward for going solar:

    • The 30% federal tax credit is perhaps the best-known example, since it applies for the entire country. However, it will be gradually phased out between 2020 and 2022. If you are considering solar power for your home or business, act quickly to get the full benefit.
    • There are also state tax credits, which are added to the federal incentive. For example, the state of New York gives you back 25% of your solar power investment as a tax deduction, with a cap of 5,000.
    solar, rebate, explained

    If you purchase a 20,000 solar power system in New York, you get 30% back as a federal tax credit (6,000) and 25% back as a state tax credit (5,000). The net cost is reduced to only 9,000, and you get more than half of your investment back in the form of tax benefits.

    Solar Power Rebates

    A rebate is a cash incentive for going solar, which is subtracted directly from your upfront costs. Solar rebates are normally granted through programs that are managed by governments or utility companies. Note there are eligibility requirements, so you should make sure that your solar power system is designed and installed by professionals. The NY-Sun program in the state of New York is an example.

    When both solar rebates and tax credits are available, the rebate is applied first and the tax credit is calculated for the net cost. For example, if you get a 5000,000 rebate for a solar PV system priced at 20,000, the federal tax credit is calculated with the net cost of 18,000. In other words, the federal incentive is 5,400 and not 6,000.

    Performance-Based Incentives for Solar Power

    Reducing the net cost of solar power systems with rebates and tax benefits is one incentive option. There are also programs that FOCUS on increasing the cash flow of a solar power system. There are two common options:

    Claim a Tax Credit for Solar Improvements to Your House. IRS Form 5695

    • Adding a performance payment per kilowatt-hour produced.
    • Creating a Solar Renewable Energy Credit (SREC) program.

    Bonus Payments per Kilowatt-Hour

    When performance payments are available, owners of solar power systems get extra cash for every kilowatt-hour generated. For example, if the local electricity price is 15 cents/kWh and there is an incentive of 5 cents/kWh, the total benefit is 20 cents/kWh. This shortens the payback period of solar panels, while increasing the return on investment.

    Since this type of incentive is so good, there is normally a capacity limit that gets filled quickly. One example is the Solar Massachusetts Renewable Target (Smart), launched in 2018. The program will grant incentives for solar power systems until a capacity of 1,600 MW is accumulated. The incentive is higher for the first movers, and it is gradually reduced as the program approaches its target.

    Solar Renewable Energy Credits

    SREC programs are an alternative to bonus payments per kWh. They can be applied when local governments have introduced clean energy targets for utilities and large energy consumers. These organizations can meet their target by producing clean energy on their own, by purchasing an amount of SRECs equivalent to their target, or with a combination of both. There are hefty penalties for missing the target, which creates a high demand for SRECs.

    • Owners of solar PV systems are awarded one SREC for every 1,000 kWh of generation.
    • SRECs are then purchased by the organization subject to clean energy targets.
    • The SREC price is determined by supply and demand, which means the benefit is variable. However, it represents a cash bonus beyond the savings from solar power.

    For instance, a SREC price of 100 is equivalent to an incentive of 10 cents/kWh, since one SREC is awarded for every 1,000 kWh.

    Favorable Laws: Net Metering and Simple Interconnection Rules

    Legislation that favors solar power can also be considered an incentive, since home and business owners can get more benefits from solar panels.

    Updated. 2022 How the Solar Tax Credit Works | Jaime Greene the Solar Queen

    • Net metering gives full credit for every kilowatt-hour sent from a solar power system to the electricity grid. This happens all the time in solar paneled homes that are empty around noon, since there is nobody to use the electricity. Businesses with large roofs can also reach surplus production if they cover a large area with solar panels.
    • Some power companies offer a feed-in tariff instead of net metering. This tariff is normally lower than the electricity price, with the argument that power companies must handle the surplus energy from solar panels.
    • Simple interconnection rules help reduce the upfront cost of a solar power system, improving the return on investment. When utilities impose complex connection requirements with high fees, power consumers are less likely to go solar.

    Having a Renewable Portfolio Standard (RPS) can also be considered an incentive for solar power. In simple terms, an RPS establishes a minimum renewable energy percentage for investor-owned utilities in the corresponding state. Since clean energy systems owned by consumers count towards the goal, utilities subject to RPS laws normally create incentive programs.

    How much is the Tax Credit worth?

    Call us at 732-410-7818 or complete the form below to speak with one of our New Jersey-based Solar Energy Consultants. Rest assured, we value your privacy! We will never sell or share your personal information!

    3- Solar Energy Sales Tax Exemption

    New Jersey offers a full exemption from the state’s sales tax (currently 7%) for all solar energy equipment. This exemption is available to all taxpayers. All major types solar energy equipment, including equipment for passive solar design, are considered eligible for the exemption as described by the New Jersey Division of Taxation Publication SU-6 (Sales Tax Exemption Administration). According to SU-6, the exemption includes all solar energy devices or systems specifically approved by the Board of Public Utilities, Division of Energy and designed to provide heating or cooling or electrical or mechanical power by converting solar energy to some other usable energy source, including devices for storing solar-generated energy. The exemption does not apply to devices that would be required regardless of the energy source being utilized. In order to claim the exemption, the purchaser must fill out and submit Form ST-4 (Exempt Use Certificate) to the seller instead of paying sales tax. Rear Here.

    4- Property Tax Exemption for Renewable Energy Systems

    In October 2008, New Jersey enacted legislation exempting renewable energy systems used to meet on-site electricity, heating, cooling, or general energy needs from local property taxes. (There is not a state component to property taxes in New Jersey). Eligible renewable energy systems include solar PV, wind, fuel cells, sustainable biomass, geothermal electric, landfill gas, hydroelectric, resource recovery, wave, and tidal systems that produce electricity. Systems that produce energy from solar thermal energy (e.g., solar hot water) or geothermal energy (e.g., geothermal heat pumps) are also eligible for the exemption. The exemption may be claimed for all qualified systems installed on residential, commercial, industrial, or mixed use buildings as accessory uses.

    solar, rebate, explained

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