Understanding Solar Installation Incentives Under the Inflation Reduction Act

In recent months, the solar energy industry has experienced significant growth. This growth can be attributed to various factors, including the easing of gridlock on Chinese panel imports and increased solar installation incentives under the Inflation Reduction Act (IRA). According to recent data, solar installations saw a remarkable 47% increase in the first quarter of 2023. With federal incentives driving much of this growth, it is essential to understand the qualification criteria for these lucrative incentives.

To comprehend the incentives for solar under the Inflation Reduction Act of 2022, it is important to familiarize oneself with the act itself. Signed into law by President Biden on August 16, 2022, the IRA expanded incentives for solar and other alternative energy projects. The specific tax credits and incentives for solar fall under Section 48 of the tax code, which pertains to solar energy and other energy property tax credits.

Under Section 48, solar projects are eligible for a 30% credit. However, large-scale projects with an electrical output exceeding 1 megawatt, which do not meet prevailing wage standards, receive a reduced credit of 6%. It is worth noting that these incentives can increase further through additional credits. These additional credits may be earned by using domestically sourced panels, placing panels in specific “energy communities,” or targeting low-income areas. Consequently, the overall tax credits for solar projects can potentially reach as high as 50% or more of the total installed cost.

While these incentives are undoubtedly lucrative, it’s crucial to understand the specific costs that qualify for the credits. Unfortunately, there is a common misconception among solar companies and building owners that roofing costs can be included. However, in most cases, this is not true. The Internal Revenue Service (IRS) has issued several private letter rulings related to roofing expenses and solar projects. One such ruling, PLR 200947027, tackled a situation where a taxpayer installed a reflective membrane on top of an existing roof to enhance the effectiveness of bifacial solar panels. Another ruling, PLR 201450013, allowed a taxpayer to claim credits for a reflective roof above the cost of re-roofing their building with a non-reflective roof. While private letter rulings do not set precedent, they provide insight into the IRS’s stance on these matters. These rulings indicate that the IRS typically permits the incremental cost of a reflective roof if it enhances the capacity of the solar panels.

With the increasing interest in solar energy, more companies are investing in research and development of related products. Solar systems have become a common consideration during lighting, HVAC, or hot water installations. In some cases, the incremental cost of additional systems may also qualify for tax credits. Section 1.48-9(d)(4) specifies that pipes and ducts carrying solar energy may be eligible for credits. Even if these pipes and ducts transport solar power and energy derived from conventional sources, a portion of the ducts may qualify for the credit if the use of conventional sources does not exceed 25%. In such cases, eligibility for the credit is based on the percentage of solar load carried by the pipes and ducts.

While these tax credits can be highly advantageous, their complexity can be daunting for both taxpayers and installation companies. It is crucial for businesses to fully understand the eligibility requirements and how to maximize the credits to reap the potential benefits.

It is important to note that the information provided here is not investment, tax, or financial advice. It is recommended to consult with a licensed professional who can provide guidance tailored to your specific situation.