Solar on the Farm (part 3)
Published July 13, 2022
Hello, my name is Fritz Ebinger and I’m with the Clean Energy Resource Teams, a program of the University of Minnesota Extension.
This video series is a joint effort between the MN Farmers Union, the Clean Energy Resource Teams, and the Citizens Utility Board of Minnesota.
You can look for additional segments about Solar for Your Farmstead on the Citizens Utility Board of Minnesota’s YouTube page, including Parts 1 and 2, which discuss solar energy basics and Minnesota’s solar resource, as well as different solar policies such as rates, fees, and solar array capacity limits.
This is Part 3 of the video series and will address some of the funding, financing, and tax advantages of solar energy. These include:
- The federal business income investment tax credit
- Accelerated Depreciation
- The Rural Energy for America Program grant or guaranteed loan (REAP))
- Commercial Property Assessed Clean Energy
Once again, we want to remind you to eat your energy efficiency vegetables first! Please conserve and use efficient technologies where it’s practical. The cheapest and cleanest kilowatt-hours and thermal units are the ones we never consume at all.
Please take a moment to examine any energy efficiency or conservation opportunities that might be available to your farmstead, such as installing efficient lighting, ventilation fans, installing proper levels of insulation, and possibly upgrading older appliances.
Generally, for every dollar we invest in energy efficiency and conservation, we save roughly $3 to $5 in renewable energy project costs. Reducing the amount of energy we consume from the start allows us to size a smaller solar array for offsetting energy needs.
Federal Business Investment Tax Credit (ITC)
As a farm business investment, a solar array qualifies for the federal business income tax credit, also known as the ITC. In 2022, up to 26% of the cost of a solar PV installation qualifies for the ITC. As of January 1, 2023, the Federal Business Energy Investment Tax Credit (the ITC) is slated to step down from 26% to 22%.
The ITC is taken after determining the farm business’ adjusted gross income. It makes solar an attractive way to re-invest in the farm business in lieu of paying federal business income taxes because the ITC is a dollar-for-dollar reduction in the farm business’ federal income tax bill.
If a farm business does not have enough tax liability to claim the full 26% ITC during the year of installation, the ITC has a 20-year carryforward period, which makes realizing the ITC a possibility for some farm businesses over time. Nonetheless, the sooner the tax credit can be claimed, the better the financial performance on the solar array investment will be.
Please note that the ITC is only taken for farm business investments, not for personal use. Any personal use for the solar array may discount the dollar value of the ITC. We strongly suggest you contact a professional accountant to ensure the ITC is available for your farm business and is properly applied.
Accelerated depreciation, also known as the Modified Accelerated Cost Recovery System or MACRS for short, is another tax advantage available for solar equipment for farm businesses.
Generally, depreciation is an annual expense deduction from business income that allows a business to recover the cost of certain property over the time the business uses the property. This accounts for wear and tear on equipment as the cost of doing business.
To claim depreciation on solar equipment, a farm business must use it in its business or income-producing activity. A business cannot depreciate property solely for personal activity or personal use.
This tax advantage is known as “accelerated” depreciation because the IRS assigns “energy property” like solar equipment, a 5-year depreciation schedule, though the useful life of a solar array is much longer at around 30 years.
100% Bonus Depreciation
As an alternative to 5-year accelerated depreciation, some farm businesses may have the ability to claim 100% Bonus depreciation. In practice, this method of depreciation operates like a one-time capital expenditure and allows a farm business to deduct the full cost of a solar array as a business expense during the year of installation.
Please note these are complicated tax advantages. We strongly suggest folks seek out qualified professional accountants to ensure these tax advantages are available to the farm business and are properly applied.
The Rural Energy for America Program (REAP)
The Rural Energy for America Program or REAP, which is managed by the USDA Office of Rural Development, offers farm and rural small businesses the chance to apply for a 25% grant or guaranteed loan for their solar array.
Farms which realize at least 51% of their gross income from agricultural production and rural small businesses located in towns of 50,000 residents or less are eligible to apply. Additionally, at least 50% of the solar energy produced for the farm or rural small business must be used for business purposes. The REAP program discounts points on the application for any personal energy use.
Eligible project costs for purposes of the grant include equipment, labor, permitting, and fees. The REAP grant will not fund moveable items such as skid loaders or farm machinery. It is specifically for renewable energy and energy efficiency projects.
The REAP grant program is competitive and folks should apply and receive confirmation of their application is completed from the Office of Rural Development before building a solar array in order to maintain eligibility. The REAP grant does not work retrospectively and will not fund a project that has already been constructed if a complete application has not been submitted first.
The two statutory “batch” deadlines to apply are March 31st and October 31st: Applications submitted on or before March 31st will be scored relative to one another. Similarly, applications submitted on or before October 31st will be scored relative to one another. In the instance the 31st day of the month falls on a weekend, the application deadline is the next business day. For more information, we suggest you contact the Minnesota Office of Rural Development or Clean Energy Resource Teams.
Commercial Property Assessed Clean Energy Loan Program
We have one last topic to discuss. The Commercial Property Assessed Clean Energy loan program – or PACE – is another program that can assist farm businesses in achieving their solar goals. The St. Paul Port Authority operates the PACE loan program through joint powers agreements with most counties and several cities in Minnesota.
PACE operates as a line item assessment on a farm’s property tax bill. In operation, the farmer requests a special tax assessment from the St. Paul Port Authority for the cost of the solar energy project they are seeking.
The St. Paul Port Authority reviews the loan application for accuracy and assurance and then grants the loan.
In turn, the dollar value of the loan is added to the local property tax bill as a fixed line item assessment, like a road or sidewalk improvement, and paid off over time with property tax bills.
Typical terms for a PACE loan are 10 years at a 4.5% interest rate, though the St. Paul Port Authority can give a 20-year term. Also, farmers can take out a loan of up to 20% of the appraised or assessed property tax value for their farm business.
This concludes Part 3 of the Solar for your Farmstead video series.
You can look for additional segments on the Citizens Utility Board of Minnesota’s YouTube page, including Parts 1 and 2 which discuss solar energy basics and Minnesota’s solar resources, as well as different solar policies such as rates, fees, and solar array capacity limits.
Thank you for tuning in and we hope you have a sunny day!