2021 Federal Tax Credit for Commercial Solar Power
Commercial solar panels are eligible for the Investment Tax Credit (ITC), just like residential installations. A 26% tax credit applies until the end of 2022, and it decreases to 22% for projects that start in 2023. The benefit will no longer be available for the residential sector from 2024 onward, but businesses will still have access to a 10% federal tax credit. Originally, the solar ITC would end two years earlier in 2022, but it was extended by Congress on Monday December 21, 2020.
The federal tax credit can be combined with local incentives for solar power. For example, if a company gets a state tax incentive and a utility company rebate for solar panels, these can be combined with the ITC.
How the Federal Solar Tax Works with Commercial Solar Panels
The solar tax credit applies based on the date when installation starts. All solar installations that start in 2021 or 2022 will get a 26% credit, but this becomes 22% on January 1, 2023. Projects must also be completed within four years after starting construction or before the start of 2026, whichever happens first. However, solar arrays are installed quickly, and four years is plenty of time even for megawatt-scale systems.
Battery Systems Included
Commercial solar arrays with battery systems are also eligible for the ITC, but the battery portion only gets the credit if at least 75% of its charge comes from solar panels. Also, the tax credit for battery systems is proportional to their solar charging percentage:
- Assume a commercial battery system installed in 2021 has a cost of $400,000.
- The maximum tax credit would apply if all the charge comes from solar panels. The 26% credit applies for 2021, equivalent to $104,000 in this example.
- However, if these batteries get 80% of their charge from solar panels and 20% from the grid, the tax credit drops to $83,200.
- The tax credit for the solar array itself is unaffected by the battery portion of the project.
In the commercial and industrial sectors, battery systems can help reduce peaks in demand. Many businesses are subject to a peak demand rates, in addition to the normal charge for energy consumption. A battery system can be programmed to supply power internally when demand is high, reducing the peak demand measured by the power meter.