I love a good federal tax credit since it is a reduction of the tax liability of the owner. Essentially, this is pure cash flow to the owner of the property. What could be better? I have two favorites improved by the Inflation Reduction Act (IRA): the Federal Solar Investment Tax Credits (ITC) for Solar and Battery Storage, and a new 45L for residential construction and major renovations.
Federal Investment Tax Credits (ITC) for Solar and Battery Storage
While there is a suite of tax credits under the ITC for residential, businesses, and manufacturers, Let’s focus on the ITC for businesses. The investment tax credit (ITC) is a federal tax credit that reduces the federal income tax liability for a percentage of the cost of a solar or storage system that is installed during the tax year. Before the passage of the Inflation Reduction Act, this incentive was 26%, but with the help of the IRA, it is back up to 30% of the project cost until 2033. (U.S. Department of Energy).
There are two bonus tax credits at 10% a pop if they are attainable.
- Energy Community Bonus: An energy community is an area identified as a brownfield site and/or locations experiencing high unemployment and fossil fuel investment. Looking at the DOE Energy Community map, most of Los Angeles County is currently designated as an energy community. Unfortunately, this is a temporary map and we in the industry aren’t exactly sure when the map is to be reset and areas may drop off.
- Domestic Content Bonus: This bonus requires a percentage (starting at 40%) of project materials (by cost) to be produced in the U.S. It is difficult to attain the second additional 10% solar tax credit. I’m told businesses are hard at work on this, making domestic materials readily available. Hooray for U.S. manufacturing!
These projects also benefit from Federal MACRS Bonus Depreciation and State Depreciation (which is, again, a tax deduction—reducing the income of the property for tax purposes).
By the Numbers: Cash Flow for Solar and Battery Storage Projects
Let’s examine some examples of tax savings when installing a solar PV system or an energy storage system. Many people aren’t aware of just how much these tax incentives can help to cover the cost of the project. The numbers speak for themselves.
Energy Storage System (90kW/220kWh)
| Gross System Cost | $ 318,244.00 | |
| IRA ITC (30% + 10% Energy Community) | $ (127,298.00) | -40% |
| SCE SGIP Rebate Program to Owner | $ (55,750.00) | -18% |
| Federal MACRS Bonus Depreciation | $ (53,465.00) | -17% |
| State (CA) MACRS Depreciation | $ (31,824.00) | -10% |
| Net Project Cost to Owner | $ 49,907.00 | -84% |
| Estimated Electricity Savings (Year 1) | $ 20,939.00 | |
| Estimated Total Net Savings (15 Years) | $ 260,574.00 | |
| Payback Period | 3.1 Years |
Solar PV System (29.4 kW-DC)
| Gross System Cost | $ 110,344.00 | |
| IRA ITC (30% + 10% Energy Community) | $ (44,137.00) | -40% |
| Federal MACRS Bonus Depreciation | $ (27,807.00) | -25% |
| State (CA) MACRS Depreciation | $ (8,828.00) | -8% |
| Net Project Cost to Owner | $ 29,572.00 | -73% |
| Estimated Annual Electricity Savings (Year 1) | $ 9,700.00 | |
| Estimated Total Net Savings (25 Years) | $ 419,117.00 | |
| Payback Period | 3.8 Years |
Tax Benefits Can Cover Over 80% of the Project Cost
The tables above illustrate how HUGE these tax incentives are. In just over 3 years, the entire cost of the energy storage system will have paid itself back. The battery can offset peak kW demand costs in high Time-of-Use (TOU) rates. Looking at the numbers, these energy efficiency projects are a no-brainer.
Green Econome Project Consulting, Construction & Incentive Management Services Have You Covered
Green Econome is here to guide you through the decision-making process and provide you with maximum energy and tax savings! We are a woman-owned, full-service energy and water efficiency construction and consulting company with over 20 years of combined experience. If you have a building for which you are considering solar and battery storage and would like a no-obligation quote, please contact CEO, Marika Erdely.
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