Written by Brian Lavinio, PEA intern and Williams College (2024)

This is the first in a two-part blog series focused on financing solutions for solar, storage, and other renewables technologies for commercial properties. The primary driver is the Inflation Reduction Act (IRA). Signed into law by President Biden in August, 2022, the historic piece of legislation contains $369 billion of federal climate-related funding. Since the IRA was signed into law, federal agencies have released updates on implementation details, regulations, and guidance. This series will educate commercial property owners on these updates and how they can monetize them.  This blog series is an update to an earlier version published in February 2023. 

The greatest benefits from the IRA for commercial property owners is expansion of Alternative Energy Credits, Section 48 of the Investment Tax Credit (ITC). Alternative energy technologies that are eligible for incentives include solar, energy storage, ground source heat pumps, geothermal, combined heat and power (CHP), electrochromic (dynamic) glass, and more. 

Section 48 provides a minimum tax credit of 30% of the total cost of eligible systems (aka “Facilities”) including materials, labor, interconnection costs, etc. The total credits can soar as high as 70% in specific instances.

Important note: The Philadelphia Energy Authority is not providing tax advice in this blog or any other communication. And while solar installers and other alternative energy contractors are also not qualified to provide tax advice, they are most familiar with what tax incentives a particular project is likely to be eligible for. 

What properties are eligible?

Nearly all commercial properties are able to take advantage of this incentive:

1. Owners with tax capacity (meaning they owe at least as much in federal taxes as the value of the credit) will receive a credit on taxes owed for the tax year the system is placed in service.
2. Nonprofits and most government-owned properties are eligible for Elective (aka Direct) Pay. After an application process, they will receive a check from the IRS for the credit amount.
3. Owners that do not pay taxes (and are not nonprofits or government entities) such as Real Estate Investment Trusts (REITs) are able to sell or transfer the credits to entities that can monetize the tax credits.

Are all projects able to receive a minimum of 30% credit?

Projects smaller than 1MW receive a 30% credit as a base amount. For projects larger than 1MW, there are prevailing wage and apprenticeship requirements that aren’t addressed here. In addition, there are significant “adders” that can increase the tax credit up to 70% (though not common) of total system cost depending on which qualifications a project meets. 

What are these “adders”?

These are bonuses that increase the value of the 30% base tax credit from the ITC. They are the Domestic Content Bonus, Energy Community Siting Bonus, and Low-Income Community Bonus. Each adder is applied differently, but they can be stacked to increase the value of a project’s tax credit. The Domestic Content Bonus and Energy Community Siting Bonus are 10% credits, while the Low-Income Community Bonus is 10% or 20%. 

What is the Domestic Content Bonus?

The purpose of this adder is to encourage the manufacturing and sourcing of American-made materials in their renewable energy projects. The IRS and Department of the Treasury issued guidance in Notice 2023-38 on eligibility and requirements to access the domestic content bonus. The U.S. solar industry has stated that the guidance makes it very difficult to meet the requirements in the next several years. They are encouraging the Treasury Department to modify the requirements in the final regulations, not expected to be released until sometime in 2024. 

Solar installers are best able to inform customers as to whether their systems meet the content requirement.

What is the Energy Community Siting Bonus?

This bonus is designed to boost development in communities with economies historically dependent on the fossil fuel industry for employment and tax revenues. The IRS and Department of the Treasury released updated guidance in Notice 2023-47. 

In order to access this benefit, projects must be located in energy communities. The Department of Energy has released a comprehensive map to help developers determine their eligibility. 

Philadelphia does not qualify though there are locations close to Philadelphia that do.  In addition, projects located on Brownfield sites are also eligible for this bonus. 

What is the Low-Income Community Bonus?

This bonus targets low income communities and projects on Indian Lands. Unlike the other bonus credits or “adders”, there is a cap on the tax credits that will be distributed in the low income community bonus. It is expected that the Low-Income Community Bonus applications will exceed the available funding. Some describe it as a “lottery” for low-income credit adders. 

This bonus is divided into categories with differing credits. Most relevant to the Philadelphia area are:

1. Facilities located in low-income communities (10% credit): Check out this map that visualizes eligible communities under this category. For the Philadelphia region, the building must be in a Census tract that is identified in the map as located in a New Market Tax Credit Low Income Community. 
2. Facilities are part of a qualified low-income residential building project (20% credit): Eligible housing programs can be found here. 
3. Facilities are part of a qualified low-income economic benefit project (20% credit): These facilities must provide at least 50% of the financial benefits of the electricity produced from the project to one of the following: 
   1. households with income less than 200% of the poverty line
   2. households with income less than 80% of the area’s median gross income

Facilities may only qualify for one of the categories in the Low-Income Community Bonus. 

Unlike the other bonuses, this requires an application through the Department of Energy. The application for the 2023 program year was opened October 19 and closed on November 18, 2023. Applications submitted after the initial 30 days will be considered on a rolling basis. To be eligible, projects must be under contract, but not placed in service. More guidance is expected to be released in 2024.

Stacking the investment tax credits for projects under 1MW

Philadelphia Energy Authority is not providing tax advice but rather educating readers about the potential tax benefits of the Inflation Reduction Act. The second of this two-part blog series is about financial incentives and financing options to go solar for commercial property owners in addition to the IRA incentives.

Credit category	% credit of total system cost *assume project cost of $200,000	Value of Bonus	Net cost of system after bonus (with base credit)	Net cost of system after bonuses (stacked)
Base credit	30%	$60,000	$140,000	$140,000 (base credit)
Domestic Content	10%	$20,000	$120,000	$120,000 (base + domestic)
Energy Community	10%	$20,000	$120,000	$100,000 (base + domestic + energy community)
TOTAL	50%	$100,000	$100,000 (base + domestic + energy community)

LOW INCOME COMMUNITY ADDERS (MORE DEMAND THAN SUPPLY – ASSUME “LOTTERY” TO RECEIVE THEM)

Low income community 10%	10%	$20,000	$120,000	$80,000 (base + domestic + low-income community)
Low income 20%	20%	$40,000	$100,000	$60,000 (base + domestic + low-income community)

Philadelphia Energy Authority is not providing tax advice but rather educating readers about the potential tax benefits of the Inflation Reduction Act. The second of this two-part blog series will be published later in January and will cover financial incentives and financing options to go solar for commercial property owners in addition to the IRA incentives.