Created in 2005, the solar ITC was made to help grow the solar energy industry. The growth that followed lead to multiple extensions, including the final one in 2015 that drew the line at 2021. While there are other incentives available when going solar, this is deemed the “most important.”
The Solar Industries Energy Association described it best:
“The Investment Tax Credit (ITC) is currently a 30 percent federal tax credit claimed against the tax liability of residential
and commercial and utility investors in solar energy property. (This) allows the homeowner to apply the credit to his/her personal
income taxes. This credit is used when homeowners purchase solar systems outright and have them installed on their homes. In the case
of the Section 48 credit, the business that installs, develops and/or finances the project claims the credit.”
The solar ITC was designed to decline throughout the years, as the industry grew. We are now in the time of decline. And Congress has passed a COVID Aid Package which extends the Solar Investment Tax Credit even further:
"The legislation provides a two-year extension of the solar Investment Tax Credit (ITC) and additional funding for research and development, including on soft costs critical to distributed energy deployment and support for more sensible access to federal lands for renewable energy projects.
Under this legislation, the solar ITC will remain at 26% for projects that begin construction in 2021 and 2022, step down to 22% in 2023, and down to 10% in 2024 for commercial projects while the residential credit ends completely. Companies beginning construction on projects in 2021 would still have a four-year period to place their projects in service to take advantage of the ITC, with the statutory deadline for projects placed in service reset to before Jan. 1, 2026."
The tax reduction has dropped from 30% to 26% with more decreases planned to follow until 2023. While 4% seems insignificant, it is really a huge difference. And to think, in the next three years this could drop all the way to 0% for residential use and leave only 10% for commercial use.
The total cost of your solar installation is $18,000 and you receive a utility or state incentive of $1,000 and an ITC rebate of $5,400; for a total incentive of $6,400. If you were to calculate the 30% ITC:
30% x $18,000 = $5400 tax credit that you can utilize as payment for your taxes to the IRS.
The incentive will be calculated on the gross installed cost of the solar project if you’re a business; the gross cost being calculated prior to deducting any local or utility incentives. The state tax incentive for commercial is 10% with a cap of $25,000 per system.
30% x $250,000 = $75,000 tax credit that your business can utilize as payment for Federal businesses income taxes.
Now, let’s calculate those numbers with the 2021 solar ITC:
26% x $18,000 = $4,680 | 26% x $250,000 = $65,000
That’s a difference of $720 residential and $10,000 for commercial.
The solar investment tax credit applies to anyone who purchases their system outright. If you own your system, you are eligible.
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*Please verify all information regarding the ITC with your tax representative as we are not tax attorneys.
Sources: https://www.seia.org/news/covid-aid-package-makes-initial-commitment-clean-energy-recovery
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