Tax is one of the largest expenditures that can happen to businesses. This is money gone that could be reinvested to grow the business further. As a result, many businesses actively try to find ways to reduce their taxes.
One of the most popular ways is to reinvest their profit into the business to grow it. But what about solar? Can installing solar energy systems help to give a business some capital allowances?
In the US, businesses that install and use solar panel systems qualify for capital allowances. The Investment Tax Credit (ITC) allows businesses to apply up to 30% of the amount they spend installing solar panels as tax discounts. There is also a Production Tax Credit (PTC) calculated based on solar energy generated.
This article explores if solar panel installations help to get you some capital allowances or tax breaks. We also look at if the rules differ between individuals or businesses.
What Are Capital Allowances?
Capital allowances can be seen as tax breaks, but for businesses. Businesses can invest in things that will grow their business and then pay less tax. The idea is to encourage businesses to reinvest, grow, and generate jobs and economic opportunities for the local population.
In short, you can equate capital allowances to tax breaks. The difference is that capital allowances are more often used on businesses, while tax breaks are used more on individuals.
By investing money into things acceptable to the government, businesses can claim a reduction in tax payments.
Capital allowances help both the government and also businesses. Businesses can use the money to grow their business instead of paying the government. This way, they keep their profit to themselves.
The government may receive less tax money. Still, the benefits may be better since businesses use the money to invest and grow the economy, generating more jobs for the people.
Capital allowances are usually given to businesses that invest in equipment, infrastructure, training, and more. They may change from time to time.
Do Solar Panels Quality For Capital Allowances?
Solar panel installations qualify for capital allowances or tax breaks. With Investment Tax Credit (ITC), businesses can apply up to 30% of the amount they spend installing solar panels as tax breaks. The Production Tax Credit (PTC) allows businesses to claim tax breaks based on the amount of energy generated.
There are many investments that qualify for capital allowances. These include equipment, machinery, staff training, and many more.
Solar panel installations are also one of the things you can do to get capital allowances and offset your tax money. This is because the US Federal Government is encouraging the renewable energy transition and wants businesses to join in.
Looking at the US Office of Energy Efficiency And Renewable Energy’s website, there are some ways solar energy installations and use can benefit businesses:
Investment Tax Credit (ITC)
In this scheme, businesses can claim up to 30% of their spending in installing solar panel systems as tax breaks. The general requirements are that the panels are installed in the United States and use either new or used solar equipment.
QUICK TIP: ITC allows businesses to claim up to 30% of their solar installation costs as a tax break.
The installation must also not be done on the property of any tax-exempt entity, such as schools or churches. When filing for ITC, you can claim the following:
Materials: Almost all the tools, equipment, and materials needed to set up the systems are claimable.
Labor: These are also claimable if you hire contractors to perform the installation job.
Energy Storage Systems: If you set up your solar energy system with battery storage, you can claim ITC. The battery must have a capacity of 5 kWh (Kilowatt hours) or more.
Some costs are not claimable, such as roofing work. The ITC applies only to the tax year you installed the solar panel systems. This means you cannot claim it in the next tax year.
Production Tax Credit (PTC)
Aside from the ITC, businesses can also qualify for further capital allowances. The Production Tax Credit allows businesses to claim tax breaks, based on the amount of solar energy they generate in the first 10 years.
QUICK TIP: PTC allows businesses to use up to 2.6¢ for every Kilowatt Hour of solar energy generated. PTC is claimable for up to 10 years after installation.
This means the PTC is seen as a continuation of the ITC, to further encourage businesses to set up solar panels and use renewable energy.
Depending if your project meets labor requirements, you may be able to claim up to 2.6¢ for every Kilowatt Hour of solar energy you generate.
If you intend to get the maximum PTC claim, you need to pay fair wages for all the work done on the solar panels for the first 10 years.
This means you pay the prevailing rates at your locality, for all construction and maintenance work on your solar panel systems.
Additional Bonus Credits
Suppose your business can fulfill some of the additional requirements. In that case, you may be able to qualify for more capital allowances when you install solar panels:
Domestic Content Bonus: To qualify for this, ensure all the steel or iron used to build your solar panel systems are produced in the US. If you can prove that the metals are mined, produced, and manufactured in the US, even better.
Energy Community Bonus: To qualify for this, you can set up your solar panel systems on a brownfield site. These are locations where there was previous development but are not abandoned or unused.
Low-Income Bonus: You get additional bonus credits if you build your solar panel systems in low-income locations or on Indian land. The system, however, needs to be under 5 Megawatt (MW)
Their additional bonus credits are given to further ensure your business money is invested in places where they provide more value. These include supporting local businesses, redeveloping unused land, and supporting low-income communities.
Businesses looking to reduce their tax bill should consider investing in solar panel systems because of the great tax incentives.
The Investment Tax Credit and Production Tax Credit provide businesses with a valuable opportunity to save money on their taxes while also investing in renewable energy.
With the potential to receive up to 30% in tax discounts, businesses can reinvest these savings into growing their business further.
It’s worth noting that tax rules may differ between individuals and businesses, so it’s important to consult with a tax professional to understand the specific tax benefits and requirements for your situation.
Investing in solar energy systems can be a smart financial decision that benefits both your business and the environment.
We are sorry that this post was not useful for you!
Let us improve this post!
Tell us how we can improve this post?