As one of the fastest-growing sectors in renewable energy, the solar industry thrives on innovation. From developing new solar technologies to refining manufacturing processes and advancing energy storage solutions, solar businesses are tackling complex technical challenges every day.

Overcoming these challenges often involves activities that qualify for federal and state research and development (R&D) tax credits, which turn innovation into tangible financial benefits by reducing taxes, boosting cash flow, and providing resources to fuel the next wave of clean energy breakthroughs.

What is the R&D Tax Credit?

The R&D tax credit is a government incentive that rewards businesses for investing in innovation. Originally a federal program, many states also offer their own versions of the R&D tax credit.

• Federal R&D Tax Credit: Available nationwide, it applies to expenses related to developing or improving products, processes, software, formulas, or technology. Solar companies often qualify through engineering, prototyping, and testing activities.
• State R&D Tax Credits: Many states (such as California, New York, Texas, and Massachusetts) provide additional incentives. These vary by state but generally mirror the federal rules, allowing solar businesses to leverage credits from both programs to minimize their overall tax liability.

For example, a solar company developing a new photovoltaic cell in California may be able to reduce its total state tax burden by utilizing both federal and state R&D tax credits.

Which Solar Company Activities Can Unlock R&D Tax Credits?

The solar industry engages in a wide range of activities that may qualify for R&D tax credits.

Key examples of these eligible efforts include:

• Solar Panel Development: Experimenting with new photovoltaic cell materials, coatings, or efficiency improvements.
• Manufacturing Improvements: Developing new manufacturing methods or automated assembly processes.
• Energy Storage Integration: Developing or refining solar and battery systems.
• Software for Solar Monitoring: Building platforms that optimize system output, predict maintenance needs, or manage energy flow.
• Installation & System Design: Testing new installation methods or customizing solar systems for extreme environments.

Even if a project isn’t successful, attempts and experimentation are still eligible for the R&D tax credit.

Key Benefits for Solar Companies

The R&D tax credit offers solar companies more than just tax savings. 

By leveraging both federal and state incentives, solar businesses can access benefits such as:

• Maximized Savings with Federal and State Tax Credits: Solar companies can leverage incentives at both levels to increase overall tax savings.
• Improved Cash Flow: Reducing tax liability frees up capital that can be reinvested in R&D, equipment, or hiring top talent.
• Payroll Tax Offsets for Startups: Early-stage or pre-revenue solar companies may apply the tax credit against payroll taxes to ease financial pressure during critical growth phases.
• Reduced Risk of Innovation: R&D tax credits help offset experimental costs, making it easier to tackle complex technical challenges without overextending resources.
• Enhanced Market Competitiveness: By lowering the financial cost of innovation, solar companies can accelerate development and stay ahead in a fast-moving clean energy market.

Common Misconceptions About R&D Tax Credits in the Solar Industry

Many solar companies assume they are not eligible for R&D tax credits. However, in reality, the program is designed to reward a wide range of innovative efforts, from small improvements to major technological breakthroughs. Common misconceptions include:

• “We don’t do research in labs.” R&D tax credits apply to field engineering, software development, manufacturing improvements, and other technical challenges, not only lab-based work.
• “Our projects failed.” Success is not required. Even trial-and-error efforts and experimental projects qualify for the tax credit.
• “We’re too small.” Startups and early-stage solar companies can benefit by applying tax credits against payroll taxes, making the incentive accessible regardless of revenue size.

R&D Tax Credits: The Engine Driving Innovation in Solar

For solar companies, the R&D tax credit is more than a tax incentive. It’s a powerful tool for driving innovation and reinvestment. By leveraging both federal and state R&D tax credits, businesses can achieve significant savings while continuing to innovate in clean energy.

If your solar company is improving technology, refining processes, or experimenting with new solutions, don't leave money on the table. Connect with Randy Eickhoff, CPA, Acena Consulting's Founder & Head Coach, for a free consultation to get the most out of your taxes.

Connect, Learn, and Maximize Your R&D Tax Credits

Register for our free monthly webinar, next on Oct. 21, 2025: Cracking the (Tax) Code for R&D.

• This workshop provides one CPE credit for professionals who are keeping up with continuing education.
• Learn more about qualifying and documenting R&D activities for tax incentives.

Visit our Acena Events page to sign up for our newsletter and stay abreast of all upcoming events.

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Edited by Laura Whittenburg, MSBME, Sr. Technical Writer at Acena Consulting. Photo courtesy of Slimdandy on Flickr.