Role Of The Section 48 ITC In Driving Commercial Solar And Wind Energy Adoption

On November 17, 2023, the U.S. Department of Treasury and IRS put forth the proposed regulations related to the ITC (Investment Tax Credit) under the Internal Revenue Code’s Section 48. Originally, section 48 was released in 1962, with the present regulations published in 1981 and the last update made in 1987.

This regulation offers major guidance on certain long-standing technologies under section 48, including geothermal, solar, biomass, and wind, along with other latest technologies included in section 48 by the Inflation Reduction Act of 2022.

Section 48 Investment Tax Credit: Key Highlights

The U.S. Department of Treasury and IRS declared the final rules of section 48 energy credit, also called the Investment Tax Credit. Under Section 48 Investment Tax Credit, the clean energy project developers will receive certainty and clarity to make major investments to generate cleaner power and strengthen the clean energy economy of America.

Some of the key highlights of Section 48 Investment Tax Credit are as follows:

With more tax incentives for Section 48 Investment Tax Credit under the IRA (Inflation Reduction Act), there has been a rapid increase in commercial solar installations.
Section 48 offers a 30% tax credit for commercial solar projects, in addition to depreciation advantages, to offer efficient Year 1 tax savings for multiple businesses.
The Inflation Reduction Act enhanced the eligibility for Section 48 tax credits to consider direct payments for specific non-tax paying organizations such as local and state government, places of worship, nonprofit organizations, universities, REITs, schools, and hospitals.
Eligibility to store batteries for solar systems for the 30% credit, promoting energy storage for several additional projects and markets.
Extra bonus credits offered for projects aligning with domestic content bonus credit criteria or located in energy communities or low-income communities can offer around 40% – 60% of total credits.
By choosing the appropriate commercial solar contractor and completing the needed IRS paperwork, you can ensure that your project qualifies for the maximum tax incentive available.
Commercial solar projects above 1 mW in size must align with the prevailing wage and apprenticeship requirements, or the tax incentive must be reduced by 80%.

How Does Section 48 Investment Tax Credit Drive Commercial Solar And Wind Energy Adoption?

In 2023, commercial solar installations rapidly increased across the nation, with Florida scoring the highest rise in commercial solar installations, as per the Solar Energy Industry Association.

The Section 48 Investment Tax Credit is skyrocketing solar projects across the United States by offering an appropriate financial incentive. Moreover, this section is driving commercial, solar and wind energy adoption in the following ways:

Direct Payments and Enhanced Eligibility

Several commercial projects can qualify for the 30% of the system cost from Section 48 Investment Tax Credit. The Inflation Reduction Act has expanded eligibility for Section 48 tax credits to include additional entities, such as community hospitals, private and public schools, nonprofit organizations, and more. In addition, the elective pay promotes the qualification of non-tax paying organizations to gain 30% credit along with any bonus credits from the IRS through direct payments. However, the Inflation Reduction Act section 48 offers both depreciation, deductions and tax credits for eligible projects.

Accelerated Depreciation or Tax Deductions

The IRA has also incentivized commercial solar by providing accelerated depreciation on a solar system. Hence, the solar system can be fully expensed and depreciated in only five years, even after having a longer lifespan.

Bonus Depreciation Or Tax Deductions

Any entity that has a solar PV system located in service can apply for a 60% bonus depreciation. This means that 60% of the total system’s cost gets expensed in Year 1. However, this bonus depreciation decreases every year.

Bonus Credits

The Inflation Reduction Act provides extra bonus credits, which further increase the tax credits offered for the installation of commercial solar if your project qualifies. These consist of the energy community bonus credit, the domestic content bonus credit and two low-income community bonus credits.

Batteries Included

For the very first time, the Inflation Reduction Act has incentivized the storage of batteries for solar systems via deductions and credits. Hence, for battery storage systems, the Section 48 Investment Tax Credit now offers a 30% tax credit. This makes storage extremely affordable for projects considering investing in systems to create and store power on-site.

Prevailing Wage and Apprenticeship Requirements

Any commercial solar project above 1mW must strictly fulfill the prevailing wage and apprenticeship requirements, or else there is an 80% reduction in the tax incentive. This elaborates that any laborer working on a solar PV project must be offered a wage that aligns with or is above the requirements mentioned under the Davis-Bacon Act.

Conclusion

For companies preferring commercial solar projects that are based on the tax incentives under Section 48 Investment Tax Credit, it is important to select an experienced contractor and create a proper agreement to prevent disputes, unexpected tax-time costs, and diminished incentives. Hence, to get the right direction for bonus credits, learn the nuances of direct pay, understand prevailing wage and apprenticeship requirements, and work collaboratively with any trusted advisor.