With the recent passing of the IRA the IRS has introduced changes that enable the tax-free transfer of renewable energy tax credits to independent buyers in the for-profit sector. This essentially converts renewable energy tax credits into a more liquid form, allowing certain developers, previously unable to capture these tax benefits, to take advantage of a huge financial incentive to invest in renewable energy.

The ITC is typically a 30% tax credit, but can be as much as 60% in certain conditions, on the cost of renewable-energy projects, is claimed in the year the project goes into service. This tax credit can also be carried forward 20 years, as well as 5 years back.

There are 10% bonuses available for projects hitting certain criterias. The qualifications for the bonuses (10% for each one) are: certain % of materials manufactured in the United States, the project is located in a qualified energy community, or the project is located in designated low-income communities. There is no limit to the number of bonuses a site can receive, so if it qualifies for all the above then it will receive 60% ITC. Through the new transferability guidance, these tax incentives can be sold on different platforms, and it is expected that they will sell at 85-95% of their retail value.

Let’s say you are a developer without a tax appetite, and you are interested in adding solar to your 100,000 sq ft industrial building, so you put 1,000 kW of solar on the roof. At an average cost of $2,000,000 you would be eligible to receive anywhere from $600,000-$1,200,000 in dollar for dollar tax credits ,which you could then sell to a tax equity buyer for 85-95% of the a cash value. If you are a developer that does have a tax appetite, then you benefit from the full 30%-60% ITC directly and you can also receive bonus depreciation (60% Bonus for 2024). Further reducing the net capital investment in your project. It doesn’t take a math whiz to see the potential here… when 30-80% of the project is covered by federal incentives, the returns will be outstanding.

Bonus depreciation allows a business to write off all of part of an assets cost in its first year of use. The 2022 Inflation Reduction Act (IRA) put into place a bonus depreciation schedule, which reduces the amount by 20% each year. In 2022 the bonus depreciation in year 1 was 100%, and in 2024 it will be 60%. So, in 2024 a $2,000,000 project will receive $355,200 cash value in year 1. The remainder of the depreciation will be recouped through Modified Accelerated Cost Recovery System (MACRS), and solar qualifies as a five-year depreciation property.

Let’s say you are a taxable developer adding a $2,000,000 solar asset to your building. If you are in an energy community or low income community, you would get 40% in ITC which is $800,000. The total tax incentives amount to 72% of the total project cost, and bring the net value down to $557,100.

Investing in solar for commercial real estate is highly incentivized, and developers/owners that take advantage of these incentives will see tremendous economic growth. The demand for net-zero buildings and more sustainable workplaces is on the rise, and you don’t have to break the bank to make your tenants happy.