On a federal level, there are two primary incentives for solar: the ITC and MACRS depreciation. USDA also has a grant program, which is available to select commercial and agricultural projects.
The ITC (Investment Tax Credit) is equal to 26% of the total project cost and is available for any entity or individual who is paying taxes. The ITC acts as a credit against income tax, but is not refundable. In other words, the ITC cannot generate a tax refund. Any excess credit from the taxable year of the solar installation can typically be carried forward 20 years, or, in some cases, backward one year. At the end of 2020, the ITC is scheduled to drop from 26% to 22%. In 2022, the credit will drop to 10% for commercial projects only. There is a “safe harbor” provision allowing projects that have begun installation in 2020 to take advantage of the 26% ITC. For a more in-depth explanation on the Federal ITC, read our blog, How Does the Federal Solar Tax Credit Work?
MACRS depreciation is available for solar projects used for business and can be taken all in the year of installation, rather than the typical 39 years for business equipment. This provides a significant benefit for business owners, particularly those in higher tax brackets.
The USDA grant is available for farms and for small businesses located in a rural area. This grant program has limited funding, which can vary significantly year to year, and has an extensive application process. For these reasons, many installers avoid the grant altogether. Paradise Energy is among the most successful installers in the northeast at securing USDA funding for their customers. They have successfully secured more than $1.27 million for 36 projects in 5 states over the past 4 years. While the application process is complicated, the grant can fund up to 25% of total cost for select projects. With the recent passage of the farm bill this year, USDA grant funding should stabilize for the next 5 years.
New York State Incentives
New York has taken a different approach to incentivizing solar, opting to use a grant program rather than SRECs. New York offers the NYSERDA incentive, and also has a tax credit for residential projects.
The NYSERDA incentive is the most important incentive for solar currently in New York. The incentive is available for residential projects up to 25 kW and commercial projects up to 200 kW. NYSERDA has limited funding available and is decreasing funding amounts for solar projects as funds are dispersed. At the writing of this article in August 2015, the funding levels are at $1.00/watt for the first 50 kW and $0.60/watt for the next 150 kW. Because NYSERDA funds are paid directly to the installer, this is money that the customer will not need to finance for their solar project. NYSERDA also has limited funds available for projects over 200 kW, on a competitive basis. NYSERDA has specific system efficiency requirements to qualify for the full incentive.
New York also has an equipment tax credit for residential solar projects. This credit is equal to the lesser of 25% of the total project cost or $5,000. This credit is not refundable but can be carried forward up to five years.
An SREC (Solar Renewable Energy Certificate) is minted for every MWh (1,000 kWhs) generated from a solar project. An SREC represents the environmental benefit of solar and is completely separate from electric savings and other benefits of solar. The value of an SREC varies significantly by state and is based on the demand for SRECs within any given state. States with requirements for SRECs include Pennsylvania, Ohio, Maryland, Delaware, New Jersey, and Massachusetts.
The requirement for SRECs is based on state law and typically increases over time. For example, the state of Maryland currently requires 0.35% of the electricity consumed in the state to be produced by solar; by 2020, that requirement is set to increase to 2%. Electricity suppliers that do not meet the requirement are fined at the current SACP (solar alternative compliance payment). To avoid the fine, electricity suppliers buy SRECs, which provides the demand.
States also vary in requirements of solar project location. Most states, including Maryland, Delaware, New Jersey, and Massachusetts require that SRECs used in compliance of their individual state laws be produced by solar projects within their state. On the other hand, Pennsylvania accepts SRECs produced anywhere in the PJM area, while Ohio can accept up to half of their SRECs from adjacent states. This has helped to cause the lower SREC prices in the states of Pennsylvania and Ohio.
Note: Paradise Energy is not a tax advisor; please consult with your accountant or tax advisor to determine how you can take advantage of tax credits and depreciation for your particular situation.