Solar Leasing and Federal Tax Credits: What You Need to Know

The jump to renewable energy can feel overwhelming. When you consider the intricacies behind federal grants, the whole process becomes a complicated equation—so let''s simplify it.

If your business is on the fence about switching, you probably have a few questions, like:  

• What is the solar investment tax credit? 

• Is leasing solar panels tax deductible?

• What''s required to lease solar panels with the tax credit?  

• Is it better to lease or purchase solar?

Continue reading to learn everything you need to know about solar leases and the federal tax credit. 

What Is the Solar Investment Tax Credit?

Simply put, the solar investment tax credit (ITC), is a specific amount of funding you're able to claim on your corporate income taxes as a direct credit.  Note a credit is not a deduction. 

A few months ago, Congress passed a solar tax credit extension which raised the amount covered by 4%. Essentially, the credit will cover at least 30% of the cost of your new solar system. 

It's important to note that if your business is considering renewable energy, you'll need to act quickly to maximize value as additional costly requirements will be added to qualify for the ITC..

Do You Get a Tax Credit for Leasing Solar Panels?

According to the U.S Department of Energy, to qualify for the ITC, your solar panels need to be a "permanent addition" to your facility. Unfortunately, the IRS doesn't consider leased items as permanent upgrades to your building. 

For example, if you invested in new solar but leased the equipment, then no—you wouldn't qualify. There are a few scenarios where you can circumvent this ordinance. If you opt for a "lease-purchase" agreement, you'd qualify for the ITC once your system is paid-off, since the IRS recognizes this as a permanent improvement to your facility. 

Another loophole enables you to reap the benefits of the ITC without purchasing your equipment up front. If your business doesn't meet the ITC requirements, several solar providers in California offer promotions to get you the savings you deserve. 

To do this, they install your new system and file the federal solar tax credit under their name. It's important to note that the ITC will apply to their business. However, the money they save from the ITC still makes its way back to you, as they'll factor the rebate into your overall costs. The price of installation could be up to 30% cheaper to compensate for the tax returns they receive on your system.

Is My Business Eligible To Lease Solar Panels With the Tax Credit? 

For your business to be eligible for tax credits when leasing solar, you''ll need to be compliant with section 48 of the IRS tax code, which states you must:

Pay Federal Taxes

To qualify for the rebate, solar panels must be used by an enterprise who pays U.S. federal income taxes. Tax-exempt entities such as nonprofits, churches, or charities won't qualify. 

Be Located in the United States

Additionally, your business must be located domestically or in a surrounding U.S. territory.

Have Limited Previous Panel Use

For your business to get a 30% refund on your solar lease, the panels must be brand new or have limited previous use. This means no more than 1/5 of your PV system can be classified as “used equipment.”

It's also important to cover that the energy harvested must be used for your daily facility operations. Simply put, you can't use the electricity generated to power personal or luxury items (i.e. heating swimming pools, charging electric cars, etc.) 

Invest in Upgrades that Qualify as "Eligible Expenses" 

Generally speaking, the ITC only applies to your solar lease if you invest in any of the following upgrades:  

• Solar PV panels

• Inverters

• Racking

• Balance-of-system equipment

• Installation costs and indirect costs

• Step-up transformers

• Circuit breakers & surge arrestors

• Generators & microgrids

As a helpful tip, additional considerations can also be applied to storage devices like solar batteries, but only if they're charged by a renewable energy system more than 75% of the time. 

For more information on federally approved storage devices, take a look at IRS private letter ruling 121432-12. 

Is It Better To Lease or Purchase My Solar Energy System?

At the end of the day, there's no right or wrong way to get renewable energy. It ultimately comes down to deciding what's best for your business. 

To help you find which avenue best suits your needs, let's dive into the advantages of each: 

Benefits of Buying a Solar Energy System

When you're the sole owner of your system, it's far easier to qualify for government and private cash incentives. Although the upfront investment associated with buying solar can be expensive, the panels will eventually pay for themselves over 10 to 20 years based on the size of your facility. 

Advantages of Solar Leasing

Depending on the terms of the solar lease, you may be able to get solar panels up and running for little to no money down. Although you continue to make payments throughout the term of the lease, you'll still see significant savings on your monthly utility bills.  

Additionally, while solar panels are relatively low-maintenance, they are not entirely maintenance free—unless you have a solar lease.

With a solar lease, any problems with your panels are covered by the third-party owner, which gives you peace of mind knowing professionals are there to keep your system in top shape. 

Pacifico Power: Energy Your Way

Is your business ready to leverage the advantages of renewable energy? Good news—you're in the right spot.