The Newly Extended Solar Investment Tax Credit Can Brighten Your Business
January 16, 2021
Despite the news coverage, the Consolidated Appropriations Act, signed by President Trump on Sunday, December 27, 2020, contains more legislation than just the second round of individual stimulus checks. The massive omnibus bill covers everything from pandemic relief to foreign aid and includes significant wins for the renewable energy sector.
Introducing the Energy Act of 2020
One of the bill’s major components is the Energy Act of 2020, which encompasses an expanse of energy-related legislation focused on extended tax credits, new grant funding and other provisions intended to incentivize investment in renewable energy. The legislation provides particularly exciting news for companies installing or investing in solar energy.
The legislation’s impact depends on whether you’re creating solar energy solutions or consuming them, so let’s dive into both scenarios.
My company develops or installs solar energy solutions. How can the Energy Act benefit me?
This bill could have a significant impact on your energy business due to two major solar-related provisions: the extension of the solar investment tax credit (ITC) and the introduction of new funding for solar energy research and development (R&D).
- Solar ITC extension is good news for solar companies. The solar ITC incentivizes consumers to purchase solar systems by providing a dollar-for-dollar reduction in federal income taxes. The ITC currently provides a 26% tax credit to consumers based on the cost of the system, making a company that invested in a $10,000 solar system eligible for a $2,600 tax credit. The credit was designed to reduce gradually over several years and was set to reduce to 22% in 2021. However, the Energy Act provides a 2-year extension at the 26% rate, much to the benefit of solar developers and installers.
This tax credit may appear more beneficial to consumers, but it has significant implications for solar installation companies as well. Consumers will be more incentivized than ever to begin investing in solar technology, and that could mean big growth for your company. The credit also opens up a variety of creative sales strategies that can help companies boost profits and realize a higher volume of sales through new channels.
Your ability to maximize your company’s benefits from the solar ITC depends heavily on a well-executed strategy, which can quickly become complex considering all the various ways the government incentivizes investment in renewable energy – that’s where Aprio can help. We work with you to create and execute a targeted strategy to maximize solar credits, and companies should capitalize on the solar ITC remaining at 26% through 2022.
- Additional grant funding for R&D opens new avenues for technological advancement. The Energy Act also included $35 billion in new funding for energy R&D initiatives, including $1.5 billion of funding dedicated to improving efficiency, cost-effectiveness, manufacturability, recyclability, and integration of solar power. The funds will be distributed across programs in the Department of Energy and could result in grant opportunities for companies performing R&D related to solar energy.
It’s critical to assess your tax strategy to ensure you’re maximizing all possible benefits and returns. It’s likely your solar energy business is eligible for the R&D tax credit, but government funding and grants could significantly change the result of those credits. Aprio’s expert advisors will evaluate your tax position and create a unique strategy tailored to your company’s needs.
My company is interested in investing in solar energy. Will the Energy Act help me?
The extension of the solar ITC is welcome news for any company interested in investing in solar energy systems as it provides two additional years to take advantage of the 26% rate. If your company is currently exploring ways to become more energy-efficient and implement renewable energy solutions, this could be a critical credit to help make that investment possible sooner rather than later. There may also be ways to optimize your company structure to maximize your benefit.
In some cases, companies are unable to benefit from the solar ITC, which creates a unique opportunity for large, highly profitable companies to step in as investors. The solar ITC allows companies to essentially buy these credits through investing in offsite solar installations and subsequently benefit from the tax credit. If your company is highly profitable and looking for new investment opportunities, this may be a creative and beneficial strategy to consider now that the credit has been extended at 26% through the end of 2022.
The bottom line
Investing in solar and renewable energy is good for the environment, and the various tax credits and incentives available make it an undeniably smart financial move as well. However, your ability to maximize those incentives is highly dependent on your ability to create a smart and creative strategy for your business.
Whether you’re investing in solar energy or selling solar systems, your company can benefit from the solar ITC, and the latest extension of the credit at 26% means now is the time to act. Don’t leave money on the table!
Aprio has extensive experience helping clients create winning tax strategies tailored to their companies’ needs and goals. Contact David Siegel or Carli Huband today to start planning your company’s next move.
About the Author
Carli is the partner-in-charge of R&D Tax Credit Services at Aprio. Carli has dedicated the last five years to performing R&D Tax Credit studies for clients in a variety of industries, with a specialty in the manufacturing and technology industries. She has worked to prepare R&D Tax Credits for companies ranging from startups to Fortune 500 businesses, performing technical interviews with subject matter experts, calculating complex credits and preparing technical reports.