Understanding the Inflation Reduction Act if you’re in solar

Here's what you need to know about the solar incentives in the IRA

The solar incentives in the Inflation Reduction Act (IRA) provide even more financial motivation for today’s homeowners looking to make the switch to solar.  Beneath the environmental buzzwords, there is one thing nearly all solar customers really want to know:  How much are they going to save with a new PV system?  With solar installation costs falling by 60% in a decade, homeowners want to join the party, so long as it will save them money and cut down on their household budgets.

While few homeowners will mistake a solar installer for a tax guru, they may still rely upon a solar company to explain the real-world impact of the IRA.  In short, solar providers that master the IRA basics can help prospective customers see the bright light of solar adoption.

Does that mean installers should spend their free time picking through the fine print of the IRA? The answer to that is a resounding no, but a little effort can go a long way.  Being able to field questions about the IRA will help build customer confidence and highlight why it's an excellent time to stop putting off that solar transition.

The nuts and bolts of the Inflation Reduction Act and solar

The magic number that homeowners will likely have on the tips of their tongues is 30%.  If your customer knows anything about federal solar incentives, that's the number they will expect to get back in the form of a federal tax credit.  But knowing exactly what is covered by this credit can be both a challenge for homeowners and an opportunity for installers.  For example, a homeowner may be surprised to know that in line with the overall tax credit, they can expect to receive a 30% federal credit worth up to $1,000 for an EV charger.

As explained by Consumer Reports, the federal refund from the IRA is part of the Residential Clean Energy Credit or solar investment tax credit (ITC).  Because that sounds like eye-rolling congressional jargon to the average homeowner (or installer), here are five critical components of the tax credit as they relate to solar installations.

1) The tax credit includes the entire installation process

Instead of just 30% off the price of the solar panels themselves, the new tax credit is much more robust than that.  Permitting fees, associated labor costs, inspection costs, developer fees, and all associated equipment are still included in the federal credit.  Even sales tax stemming from the purchase of PV solar panels is eligible.  Ultimately, if it's critical for the solar installation, Uncle Sam will give you 30% back come tax time.

2) There is no upward limit on a potential refund

Those with a larger roof might worry they would reach some sort of credit threshold, but fortunately, this is not the case.  No matter how expensive the overall project is, a solar customer is entitled to a 30% federal tax credit, providing an incentive for anyone considering solar.

3) The solar credit is in place for the next 10 years

Even if we have solar-powered flying cars and drones delivering pizzas in the year 2032, the renewed solar tax credit will still be in effect.  Because this does have the potential to create less urgency in a homeowner, solar installers should be prepared to address the concerns of a prospective customer who is contemplating waiting.

Have your sales team emphasize that while a homeowner could choose to wait, the conditions are excellent to begin the payback period and experience savings sooner rather than later.  With the average payback period for a residential solar installation being just under nine years, most homeowners installing a PV system in 2022 should have paid off their panels by the time the new tax credit expires.

As a side note, the credit is slated to drop to 26% in 2033 and then to 22% in 2034.  It's also retroactive for any installation that occurred in 2022.

4) Tax breaks can be rolled into the following tax year

One item that didn't quite make it into the final bill is the refundability clause.  If the refundability clause had been adopted, homeowners could have received a cash refund if their solar tax credit exceeded what they owed in federal taxes.  But customers can still rest assured that they will still get their full credit.  Instead of a direct payment, any leftover portion of the solar credit can be added to the following year's taxes.

5) Batteries are included in the IRA, and they can even be added later on

Battery storage for solar energy is expected to grow at a compounded annual rate of 20.2% from 2022 through 2028.  For those who don't speak the language, this is a stunning growth expectation that is hard to find in any other market in the world.

With this in mind, the solar incentives in the Inflation Reduction Act provide some additional flexibility for homeowners who want to add a battery unit to their PV system.  Although adding battery storage alongside a new solar installation is still probably the easiest path for most homeowners, customers that opt to wait can still get a 30% federal tax credit for adding a battery unit later on.  The one caveat:  A battery must be able to store a minimum of 3 kilowatts.

Understanding the incentives for electrical upgrades

The Inflation Reduction act can also be used by installers to counsel prospective customers with aging and outdated electric panels.  With nearly 50 million U.S. homes needing electrical upgrades, outdated electric panels are one of the biggest impediments to electrifying a home.  Old panels can be especially problematic for prospective solar customers who want a PV-powered roof backed up by battery storage.

The solar aspects of the Inflation Reduction Act directly address this major roadblock to solar adoption.  To tackle the issue, the IRA offers major incentives in two ways:

  • The High-Efficiency Electric Home Rebate Program (HEEHRA) for low and middle-income households
  • Additional federal tax credits for those who don't qualify for HEEHRA

How a homeowner captures savings for an upgraded electrical panel will depend on income relative to the area (Area Median Income, or AMI).  A customer who makes 80% of the AMI or less can get up to a $4,000 point-of-sale rebate for a new electric panel, which means a direct discount on the purchase price.  For those in this AMI category, the rebate can actually cover 100% of the cost.  For homeowners with an income between 80-150% of their AMI, they can still get up to 50% off the cost and a maximum rebate of $4,000.

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Homeowners making above 150% of the AMI are still in an excellent position to have a discounted electric panel upgrade.  These households can roll the cost of the electric panel into the cost of a solar installation, making them eligible for a 30% federal tax credit.

Separately, a very similar incentive is in place for electrical wiring upgrades, with a maximum $2,500 rebate for some households and a $600 federal credit for others.

EV Chargers and the Inflation Reduction Act

The tax credit for EV charging stations and related equipment originally expired at the end of 2021, leaving the issue up in the air prior to the Inflation Reduction Act.  But the IRA brought back older incentives and added a few new ones, facilitating the adoption of residential EV charging stations.  

With all the major automakers rapidly changing from ICE (internal combustion engines) to electric in the coming years, more and more homeowners will be looking to add both PV solar systems and EV charging.

For many homeowners, EV charging is a central reason to go with a PV solar system in the first place.  According to some industry estimates, customers can pay as little as $200 to charge their car for an entire year of use, which is a stunningly low cost compared to ICE alternatives.  Meanwhile, the average gas-powered car can cost a nauseating $2,700 a year at the pump.

This anticipated savings – just like with solar adoption in general – is the motivation for adding EV charging to their homes.  Anticipating the rising tide of EV home charging is a big part of the Alternative Fuel Refueling property tax credit, which builds on the earlier credit.  

The credit will also begin to cover bidirectional (two-way) chargers starting in 2023.  While there is some gray area for commercial customers, businesses will also be able to tap the new tax credit for EV chargers as well.

Direct payments for nonprofits and certain entities

Solar installers don't need to be tax experts to provide at least the basics of how certain customers might receive direct payment tax refunds.  While residential solar customers with low tax liabilities can roll their tax credits to a future year, businesses and many other entities might be able to get a lump sum payment at tax time.

For example, a nonprofit organization that installs a PV solar system will likely be able to receive its tax credit in the form of a direct payment refund.  Crucially, this can also apply to many businesses that are operated out of a typical household.  In practical terms, it's easy to see just how this can incentivize a smaller entity to go forward with a solar installation.

Here are some related scenarios to be aware of:

  • Tax-exempt and low-liability entities installing or upgrading a PV system can receive a direct payment
  • Developers with low tax liabilities can receive a refund or transfer the credit
  • The extended Production Tax Credit (PTC) can lower tax liability over the next 10 years

While residential solar customers will be utilizing the ITC, many businesses will be able to enjoy lower tax liability simply by generating energy over the next decade.  Without delving too deeply into the details, the PTC provides more tax incentives for systems that generate more kilowatts.  Larger companies will certainly be taking advantage of this, but local governments, religious organizations, and many small businesses can as well.

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Although solar providers should be wary of making promises about direct payments, related questions also shouldn't sound like Ancient Greek to an installer.  A little bit of understanding here can go a long way, and installers might even get misguided residential customers asking about direct payments.  Ultimately, any entity interested in direct payment tax refunds or taking advantage of the PTC should be encouraged to speak with a tax expert.

How the new solar tax credits differ from the old one

There are two essential ways the solar incentives in the Inflation Reduction Act assist with tax credits: extending old credits and refining the technology to which they apply.  By extending credits through the ITC and PTC, builders overseeing new constructions immediately can breathe a sigh of relief and continue with their plans to add PV solar systems.  Any builder who began construction after Jan. 1, 2022, will still be eligible for the same investment and production tax credits as before.   

That changes a little bit as of January 2025.  After that date, the production threshold for the PTC could change, and new constructions will have to consider newly drawn guidelines.  But even after January 2025, builders will still have through 2032 at the very least to take advantage of ITC and PTC incentives on new constructions.

The region of a new solar project could also bump up the tax credit from 30% to 40%.  New projects based in low-income areas or those dubbed "energy communities" can receive even more tax credits.  Although experts are still waiting to see exactly how these additional incentives will work, they could have a large impact over the next decade.

How changes specifically affect residential solar customers

With the enormous growth in personal PV solar systems, most installers will want to understand the basics of how the IRA changes the tax liability for the average homeowner.  The main thing to know is that the basic ITC credit was increased back to 30%; the rate had shifted over the years and recently was 26% for systems installed in 2020 or 2021.

Of course, what homeowners will really want to know is what this will mean to their bottom line.  For a $25,000 solar installation, this would mean an additional savings of $1,000 over the rate from 2020-2021.  Overall, a residential solar customer could expect to receive a $6,500 federal tax credit instead of $5,500 for a solar project that costs $25,000.

Why solar installers may want to learn more about the Inflation Reduction Act

Even though solar installers should be careful about providing tax advice, the more they know about the IRA, the more trust they can develop with homeowners.  Those who work with a lot of businesses, tax-exempt entities, and developers have more reasons to master the IRA.  While the residential impact of the IRA is relatively straightforward, nonresidential solar has many variables that need to be considered.

To improve knowledge of the IRA or simply to stay on top of industry trends, it can be an excellent idea to join groups like SEIA or other similar trade organizations.  As a reminder, salespeople can write off membership costs on their taxes while networking and staying up to date with developments in the industry.

Additionally, there are events that can help installers build their knowledge of the IRA and related trends, including:

Use the Inflation Reduction Act to give your business an edge

The solar provisions of the Inflation Reduction Act are providing some enormous opportunities for both homeowners and installers.  While homeowners are excited about the direct financial incentives, solar installers have a chance to help homeowners better understand how the IRA will personally impact them.  The better equipped an installer is to handle questions, the stronger their connection with the homeowners will be, opening the door to happier customers, better reviews, and organic business growth.

Contact Bodhi today to see how an easy-to-use customer portal powered by automation can help you maintain high levels of satisfaction and save your installers time as you communicate with your customers about costs, tax credits, savings, job progress, and more.

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