Renewable energy is a growing area of interest for many farms. In particular, off-grid solar energy systems have become a popular form of renewable energy. Off-grid systems are stand-alone power units not connected to the electrical grid. They directly use the energy created from solar panels for powering farm systems and, as a result, can help reduce electricity costs to connected systems on farms. However, a large barrier to installing off-grid systems has been their cost. With the passage of The Inflation Reduction Act, the costs of installation are potentially much more manageable.
This is a follow-up to the Michigan State University Extension article: “Considering Solar Energy? It Can Yield Real Cost Savings on Your Farm.” The first article presented scenarios of on-farm cost savings from solar energy systems. In this article, we’ll focus on opportunities through USDA’s Rural Energy for America Program (REAP) to reduce installment costs.
REAP focuses on renewable energy systems and energy-efficient improvements. It provides funding specifically to agricultural producers and small businesses in rural areas to install and implement solar energy systems. In 2022, the Inflation Reduction Act provided over $1 billion in funding for this program.
Solar Grants Through REAP
Administered through USDA Rural Development, REAP grants can cover up to 50% of off-grid solar installation costs. These are competitive grants and are not guaranteed. However, if received, they can greatly reduce solar installation costs.
To illustrate how REAP can assist with offsetting solar investment costs, let’s look at an example. Our example farm has decided to install a 10-kilowatt system (1 kilowatt = 1,000 watts). Using an average of $3 per watt, this 10-kilowatt system costs $30,000 to be fully installed. Our example farm receives a REAP grant, which decreases costs by $15,000 (50% x $30,000). This leaves $15,000 in remaining costs. Our example farm uses $3 per watt to calculate installation costs, which is often used as a starting point for most system design costs. System costs vary depending on components and the farm’s desired goals, which determine how much solar is needed. The design and cost of a solar system will also influence financing and returns on investment.
USDA will soon be taking applications to compete for the fiscal year 2024 REAP grants. Round Two of applications will be due March 31, 2024. Round One was completed in 2023. Templates are available on the USDA Rural Development application website or at local offices.
Guaranteed Loans Through REAP
REAP also offers guaranteed loans to help cover the remaining installation costs. The total of grants and loans within REAP can cover a maximum of 75% of total project costs. Unlike the grant portion of support, the loan portion must be repaid. With a 50% grant, a loan could be made for 25% of project costs to reach the 75% maximum. A loan for 25% of the installation cost would cover $7,500 of our $30,000 example system. Loan terms can be up to 40 years. Work with your lender to identify what loan terms work best for your farm’s situation. In order for a grant and guaranteed loan to be used, applications must be made together.
Since the program limits grant and loan funding to 75% of the installation costs, the remaining 25% of costs will still be required to pay in cash. In our example farm, as shown below, the remaining costs would be $7,500 (25% x $30,000).
Tax Savings for Solar Installations
The Inflation Reduction Act provides for the Investment Tax Credit, which allows businesses a tax credit of up to 30% of the cost of installing a solar energy system. Tax credits offset costs by directly decreasing the farm’s tax liability. The U.S. Department of Energy, Federal Solar Tax Credits webpage outlines the tax credit amounts and eligibility requirements. These tax credits require that systems be new and installed prior to 2034. These systems must be owned by you as a business owner. Solar systems for leasing or selling electricity are not eligible for tax credits. In addition, prevailing wage and apprentice labor requirements apply. Speak with your tax preparer to determine if you qualify for this credit.
To illustrate the potential benefits of the tax credits, let’s revisit our example farm. Our farm has installed a 10-kilowatt solar system with a project cost of $30,000. A tax credit for 30% of project costs would be equal to $9,000.
Additional “bonus” tax credits of 10% each may also be available for solar energy system installation. Farms that are located in a low-income community may be eligible for the Low-Income Bonus. A low-income community is defined as one in which the median family income is 80% or less of the statewide and/or metropolitan area median income. Additionally, the Domestic Content Bonus may apply if construction exclusively uses domestic labor and U.S.-made materials.
Depreciation expense is another income tax tool that can help recover installation costs. Solar energy systems are depreciable assets. It is important to note that the use of tax credits may limit how much depreciation expense is available. Also, the REAP grant is considered farm income. Farmers should review with their tax professionals how these implications might impact their tax management plan.
It is further important to note that the program benefits and the tax savings may occur after the cash payment for installation is required. There are a variety of requirements for the full program benefits and tax savings to apply.