How the Business Energy Investment Tax Credit (ITC) Can Benefit Freelancers
As a freelance business owner, you may be eligible for the federal Solar Investment Tax Credit and Business Energy Investment Tax Credit (ITC), which were introduced as part of the Inflation Reduction Act (IRA). For example, if you’re a business owner, you can take advantage of the ITC when installing a solar panel on a commercial building and benefit from a direct credit on your taxes.
Another way you can take advantage of the ITC is with tax credits for improvements to your personal residence. We’ll cover both below so you can maximize the tax advantages the ITC can provide to you as a freelancer.
The Residential Investment Tax Credit May Reduce Your Freelance Tax Bill
As a homeowner the ITC can provide a tax credit of up to 30 percent for residential improvements that meet the IRS criteria. This credit is currently available for the next 10 years starting in the 2023 tax year.
Residential projects that are eligible for the ITC include solar panel systems which are central to the expansion and extension of the Residential Clean Energy Credit—also known as the ITC.
The ITC increases the amount of credit for installing a residential energy solar system that you can apply against your income tax burden from 26% to 30%. The tax credit is also retroactive to solar energy systems installed during the 2022 tax year.
Once your solar power installation is complete, you can only claim the ITC once and you must also have proper documentation from your installer so you can claim the credit on IRS Form 5695 as part of your tax return.
You can also carry over any unused amount remaining on your tax credit that you could not claim in a single tax year.
To be eligible for the Federal Solar Tax Credit, you must install a solar energy system that provides electricity for a residence, such as solar water heaters or a solar photovoltaic (PV) system.
The Residential ITC Has a Step-Down Schedule
Although the ITC will be around for at least the next decade, it will begin to phase out in 2033. At that time, the credit amount steps down to 26%. In 2034 it will be further reduced to 22% and eliminated for the tax year 2035.
Good news if you recently installed a solar panel or hot water system in 2022, you are eligible to claim a federal tax credit that covers 30% of the following:
- The cost of your solar panels.
- The cost of solar equipment accessories such as inverters, wiring and mounting hardware.
- Labor costs for solar panel installation, including fees related to permitting and inspections.
- Solar power storage equipment costs like solar batteries.
- Storage devices with a capacity rating of at least 3 kilowatt-hours (kWh).
- Sales taxes paid for eligible solar installation expenses. Be aware that some states waive sales tax on some of these items so check for your state’s regulations.).
Other requirements to be eligible for the ITC include:
- You must own the solar system outright (not lease it).
- The system must be located in the United States.
- The system must be located at your primary or secondary U.S. residence or for an off-site community solar project.
The tax credit reduces the amount of income tax you’ll owe. It’s not an immediate discount on products and installation. You’re still responsible for the upfront cost of the system.
Other solar energy options, such as purchasing an interest in an off-site solar project also include tax credit benefits and could be another choice beyond installing your own system.
You may also be able to take advantage of incentives to reduce the total installation costs of your chosen system from electric utility rebates and renewable electric certificates to state government rebates and state tax credits. These other deductions will affect your federal tax return.
Since each state has different incentives in place for energy-efficiency initiatives, check out what is available in your own state. Some of the states with the highest number of incentives include California, Texas, Minnesota and New York.
How the ITC May Reduce Your Freelance Business Taxes
If you make certain investments in energy efficiency in a commercial building related to your business, you may also be able to claim a credit on your taxes equal to 30 percent of the cost of your energy efficient improvements.
According to the IRS, you can claim the full ITC cost if you have already paid five percent of the project cost which means if you t the expenditure.
As a result of the Inflation Reduction Act in 2022, the ITC was set at 30% and extended for at least the next decade, so you may wish to consider qualifying projects related to your business in tax years 2023 and 2024. Starting in 2025, there are more criteria you must fulfil before you can get the full 30% tax credit.
After 2025, the continuation of the ITC for commercial projects such as solar panel systems and other energy-efficiency initiatives will depend on whether the solar and electric sectors meet the U.S Department of Treasury’s goals of reaching a 75 percent reduction in emissions below 2022 levels.
The ITC provides a direct credit on your taxes: instead of reducing your taxable earnings, the ITC just is a credit towards what you owe. As a freelance business owner, you can take advantage of both the EITC and bonus depreciation.
How the ITC Differs for Residential and Commercial Tax Credits
While the ITC is similar for businesses, there are two key differences from the rules for personal tax credits related to energy efficiency which you should be aware of:
For businesses the ITC includes a commence construction / safe harbor clause which allows you to claim the full ITC for a certain tax year even if you have not yet completed the installation and interconnected it to the grid, unlike a personal project at a private residence which much be commenced, completed and connected in the same tax year as the credit is claimed.
The “commenced construction” point means that instead of having to physically start your commercial energy efficiency project the IRS says you can claim the full ITC cost if you’ve already paid for at least five percent of the project cost. So if you plan your project to commence in 2024 but pay a deposit of at least five percent before the end of 2023 you can claim the credit in 2023.
The IRA also changed the energy efficiency tax incentives available to businesses by introducing “adders” to provide additional tax credits beyond the default 30%. These are stackable additional credits that can each provide up to 10 additional percentage points of tax credits for each project such as:
- 10% if 40% of the manufactured components were produced in the U.S.
- 10% if the project is located in an energy community, meaning it has brownfield sites or coal plant closures.
- 10% if the project is less than 5 megawatts in capacity and is located in a low-income community or tribal land.
- 20% if the project is less than 5 megawatts and is installed as part of a low-income residential building project or economic benefit system.
Which business-related projects qualify for energy efficiency tax credits?
Beginning January 1, 2023, eligibility for the deduction is expanded to include:
- Owners of qualified commercial buildings
- Designers of energy efficient commercial building property installed in buildings owned by government entities, Indian tribal governments, Alaska Native Corporations and tax-exempt organizations.
The deduction was previously available only to owners of qualified commercial buildings and designers of installations in buildings owned by government entities. To qualify, a building must be:
- A commercial building (includes apartment buildings over 3 stories)
- Located in the U.S.
- Subject to the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1
- Built with qualified property including depreciable property installed as part of interior lighting systems, heating, cooling, ventilation and hot water systems or the building exterior.
- Certified to produce required minimum energy savings , as summarized by the IRS: “Beginning in 2023, buildings must reduce energy costs by at least 25% over the applicable ASHRAE standard to qualify.”
- For property placed in service in 2022 and before, the minimum energy reduction is 50%.
Required minimum energy savings apply.
The following energy efficient parameters apply from 2023 onward in regard to claiming the ITC buildings must reduce energy costs by at least 25% over the applicable ASHRAE standard to qualify.
For property placed in service in 2022 and before, the minimum energy reduction is 50%.
Energy efficient property placed in service in 2023 and after as part of a qualified retrofit may qualify for a deduction.
For property placed in service in 2023 and after, the deduction equals the lesser of:
The cost of the installed property or the savings per square foot calculated as:
- $0.50 per square foot for a building with 25% energy savings
- Plus $0.02 per square foot for each percentage point of energy savings above 25%
- Up to a maximum of $1.00 per square foot for a building with 50% energy savings
Expenses deducted in the prior 3 years (4 years for an allocated deduction) reduce the maximum deduction before calculating the current-year deduction.
Changes to ITC deductions based on prevailing wage and apprenticeship bonus.
Beginning in 2023, taxpayers (including their contractors) who pay local prevailing wages and meet apprenticeship requirements have an increased maximum deduction.
The maximum amount increases to five times the savings per square foot amount.
For property placed in service before January 1, 2023, the deduction is capped at $1.80 per square foot (indexed for inflation after 2020) for buildings with 50% energy savings. A partial deduction is available on certain property.
All expenses deducted in prior years are applied against the cap before computing the current-year deduction.
It is important to check if an energy-saving project might be eligible for the ITC and be sure to also check with a tax professional to ensure you truly understand the potential tax implications of the credit on your personal freelance taxes and your freelance business tax return.