What JKB Clients Should Know About the 2023 ITC
JKB Energy is committed to keeping our client community updated on the energy industry. Making sweeping changes to the American energy landscape, Congress passed the Inflation Reduction Act (IRA) in 2022. The IRA incentivizes the development of clean on-site generation in order to address environmental goals. One incentive is the investment tax credit (ITC)––which lowers the federal income tax liability for a percentage of the cost of a solar system installed within the tax year. The following information offers a comprehensive overview of the 2023 ITC:
1. Two Tiers for Solar System Projects
The ITC uses two tiers to categorize solar system projects: capacity less than 1 MW and capacity greater than 1 MW. Projects less than 1 MW qualify for a 30% ITC, but may be eligible for an increase to a 50% ITC. 100% American-made steel and at least 50% American-made components make projects less than 1 MW eligible for an additional 10% credit. Projects less than 1 MW may also receive an additional 10% credit if they are sited in an energy community.
On the other hand, projects greater than 1 MW qualify for a 6% ITC. These projects may receive an additional 2% credit if they use American-made materials or are sited in an energy community. These credits can be stacked. Additionally, the credits receive a 500% increase if the project pays prevailing wages and uses qualified apprentices for minimum 15% of labor. If projects greater than 1 MW meet all labor requirements, they qualify for a 30% ITC with the potential to earn an increase up to 50% if made-in-America and energy-community conditions are satisfied.
2. Expenses Eligible for the ITC
Eligible property for the ITC––alongside all sales and use taxes on the equipment––includes solar PV panels, inverters and balance-of-system equipment. Installation costs and prorated indirect costs qualify for the ITC. The ITC also covers step-up transformers, circuit breakers and surge arrestors. While the cost of roof installation does not often qualify, incremental costs (or the amount over what would have been spent if the roof were not solar) are eligible for the ITC.
3. Transferability and Direct Pay
Formerly, the ITC was subject to carryback and carryforward rules. However, as of 2023, tax credits may be sold one time.
The IRA permits direct pay for tax-exempt organizations (nonprofits and government entities), which enables these organizations to receive payment comparable to the ITC benefits. Tax-exempt organizations may now own their energy projects, which prevents them from entering a PPA agreement with a private utility company. Eligible parties may receive grants equivalent to (at most) a 30% ITC from the Department of Energy.
Summary of Changes
The IRA incentivizes the development of clean energy projects via the ITC.
The ITC––which covers a wide range of solar system costs––splits energy projects into two tiers: capacity less than 1 MW and capacity greater than 1 MW.
Projects that use American-made materials or are sited in an energy community qualify for ITC increases.
Tax credits may now be sold, and tax-exempt organizations are eligible to earn ITC benefits through direct pay.
We’re here to help you stay up to date on changes to the American energy system. At JKB Energy, our clients come first. Please don’t hesitate to reach out to rich@jkbenergy.com with any questions about how the ITC impacts you.