Solar Energy Opportunities: A Look Ahead
I personally had the opportunity to interview numerous companies before deciding to “go solar” on my own personal residence this month. I quickly realized that my wife and I needed guidance from an organization that could provide me with information and insights I could trust. Chris Cucci, Chief of Staff of 3-year-old digital community bank, Climate First Bank, provides this and more!
Climate First Bank is a full-service bank with a laser focus on environmental sustainability and doing good. In 2021, it launched with one purpose: to create a bank that does good for the planet, people, community, and shareholders. This guiding principle has fueled the Bank's tremendous growth, evidence that it is succeeding not despite its mission, but because of it. The bank provides services in all 50 states and supports over 3,000 preferred and vetted solar energy consultants who install the equipment on your home or business.
The bank provides the solution that so many solar companies are missing. Most other solar lenders charge hidden Dealer Fees, which can increase the cost of the project by 25% to 40%. In essence, those companies take the tax credit advantage discussed below and add it to your overall cost of the project. Climate First vets the installers on their platform to ensure they are reputable and that they are charging a fair price, size systems appropriately, and offer financing for the solar equipment with an industry-leading 30-year term, at a fixed interest rate, where the collateral is the solar equipment, and NOT your home itself. When you get your tax credit, you can reduce your loan by the amount of the credit and the bank will recalculate your payment lower, not keep the payment the same which can reduce interest paid over the life of the loan, Win-Win-Win all around!
Now to the details
Embracing solar panels for your business or home transcends economic reasons. It has the added benefit of supporting principles of environmental sustainability and contributing to reducing the carbon footprint on the planet. As importantly, there is an opportunity to limit or eliminate an increase in your power bill in the coming years, which by many accounts, is exceeding 5% per year. Over 25 years, that adds up to tremendous savings.
We want to share important information about federal tax credits that you can use to benefit you.
“Will I have a large enough tax liability to qualify for the tax credit? Will I still have an electric bill?” are some of the questions you may have when considering investing in solar panels. We'll put some context into this to help you determine if it’s a suitable investment.
The U.S. Department of Energy has 2 types of Federal tax credits for solar panels for homeowners as well as businesses and other entities, such as nonprofits and local and tribal governments, that purchase solar energy systems:
- 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.
- The production tax credit (PTC) is a 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 the federal income tax liability and is adjusted annually for inflation.
Solar systems that are placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC or a 2.75 ¢/kWh PTC if they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW) in size.
>> Read our blog on Foreign Tax Credits to understand the benefits of being an international investor.
Certain differentiations for business eligibility are detailed below. Please be sure to consult with your tax professional to understand what rules apply in your situation.
What projects are eligible for ITC or PTC?
To be eligible for the business ITC or PTC, the solar equipment must:
- Be in the United States or U.S. territories
- Use new and limited previously used equipment
- Not be leased to a tax-exempt entity (for example, a school) although tax-exempt entities are eligible to receive the ITC as a direct payment.
How long will ITC and PTC last?
Unless Congress decides to renew them, the ITC, PTC, and associated rebates begin to phase out for projects that begin construction in 2032 or in the year in which the Secretary of the Treasury determines there has been a 75% or greater reduction in annual greenhouse gas emissions from electricity production in the United States compared to calendar year 2022.
Systems larger than 1 MW that begin construction 60 days or more after the Treasury's labor guidance and do not meet labor requirements are subject to an 80% reduction, including local content and energy community bonuses. Calculation examples:
ITC: (30% + 10%) / 5 = 8%
PTC: (2.75¢/kWh + 0.3¢/kWh) / 5 = 0.6¢/kWh).
Are there other incentives for solar purchases? How do they change tax credit calculations?
State governments consider taxable income and do not change the tax base when calculating the ITC. For example, if the tax base is $1,000,000 for a photovoltaic system installed at a retail business that began construction in 2022, is placed in service within four years, and the state government provides a one-time rebate of $100,000, the ITC would be calculated as follows:
0.3 * 1,000,000 = 300,000 USD.
Solar incentives and policies that do not reduce the tax base may include state performance-based incentive payments, state and local income tax credits, or state and local property tax exemptions on equipment.
Common red flags to avoid
As with any sales pitch, if it seems too good to be true, it probably is. Beware of these common tactics that unscrupulous solar sales representatives might use to mislead you:
- Exaggerating available tax credits: While homeowners may have access to state and federal tax credits, they are not always entitled to the full amount, particularly if they have a low tax liability. The applicability of these credits varies with your financial situation, so personal research is crucial to prevent misinformation.
- High-pressure sales tactics: Representatives might present loans or deals as being available for a limited time only, pressuring you to commit hastily without fully weighing the consequences and exploring other options. Remember, other opportunities will arise; never feel compelled to make an uncomfortable decision.
- Concealing extra costs or fees: Companies might try to obscure additional fees or unexpected costs within the fine print of a contract, hoping they will go unnoticed. It's important to inquire about any item in your contract and expect full transparency from the company regarding the contract's contents.
How to make sure you're finding the right deal for you
With so many red flags around, it can feel impossible to know what to believe. Here's how you can make sure you're doing the right thing when going solar:
- Obtain competitive bids: Regardless of your location, a multitude of solar installers are likely available in your vicinity. By contacting them or utilizing platforms like Energy Sage, you can ensure that you're evaluating and selecting the system that best fits your needs.
- Discover potential incentives: Tax credits can significantly reduce the cost of going solar, making it an affordable option. To understand the incentives you're eligible for and their mechanics, research the programs available in your region. For insights into the federal solar tax credit, refer to this article.
- Choose the appropriate payment method: Various payment options exist for solar panels, including outright purchases, solar loans, and leases. The right choice depends on your circumstances. Investigate the dealer fees, payment plans, and the possibility of retaining any tax credits to determine the best option for you.
How H&CO can assist you
There are several ways to pay for solar panels. This includes cash payments, solar loans, and leases. Each of these options may make sense depending on your situation.
Tax credits are a great benefit that can make solar energy affordable for you. To learn what tax incentives you qualify for and how they work, check with the programs and tax professionals in your area.
To claim the ITC, taxpayers must complete and attach IRS Form 3468 to their tax return, which can be found on the IRS website.
To claim the PTC, taxpayers must complete and attach IRS Form 8962 to their tax return. Our accounting firm has over 30 years of experience in the US tax industry, and we can assist you in the preparation of this form and provide tax advice so that you can file your forms correctly. Contact us!
By Geoffrey Gallo, Partner H&CO USA, and Chris Cucci, Chief of Staff, Climate First Bank.
For information on financing your solar equipment, contact Chris Cucci at Climate First Bank at commercialsolar@climatefirstbank.com or visit www.climatefirstbank.com
