In 2015, the U.S. government extended the federal energy Investment Tax Credit (ITC) program in order to continue to encourage the implementation of renewable energy sources. Since the ITC was started in 2005, the solar industry has seen amazing growth, with less than 1 GW produced in 2006 to more than 100 GW produced today. Thereore, ITC it is being phased out by 2022 since it acted as a stimulus for growth of green renewable sources.
However, you can still get 26% of your installed solar cost back in the form of tax credit if you start installation in 2020. Before we get into the details, let’s cover some basics of investment tax credits.
What are Solar Investment Tax Credits (ITC)?
When you begin installing a solar panel system, you are eligible for tax credits when it is completed. This credit is a percentage of your total installation cost (in other words, capital expenditures or CapEx), and it has no max.
Currently, as of 2020, that rate is 26%, which means a tax credit of $5,200 on an average $20,000 solar rooftop system.
Tax Credits are credits used to pay your taxes. It is different than a refund, which represents cash returned to you and different than a deduction since it is not part of your taxable income calculation. To explain it very simply, if you owe $100 in taxes, and get an $80 tax credit, you will pay off $80 of your owed taxes with the credit leaving you with only $20 out of pocket.
ITC is a great way to spur growth of renewables since you are essentially getting a discount on your installation costs, which improves the return on investment of the system.
Why was Solar ITC Created?
At the time when the ITC program was created, solar was prohibitively expensive and many people were reluctant to install it, so the government set out a plan to encourage the public to go green. They created the Energy Policy Act of 2005, which included the ITC program, and at the time it was set to expire in 2007.
However thanks to amazing results, the program was renewed in 2006 and again in 2015. The program was very successful and since its implementation, solar prices have fell by 90% and installations have grown by nearly 10,000% and will continue to grow by an estimated 56% a year going forward. Solar is now on-par with conventional generation.
How Does ITC Work?
For Residential Homes
For Residential Solar, 26% of the final cost after state incentives will be returned as a tax credit. This means that if a system costs $20,000 to install, but the state offers a $3,000 rebate, the tax credit will be 26% of $17,000.
For the 26% credit, work on the installation must begin in 2020. It will be lowered to 22% if work begins in 2021, and nothing for work started in 2022 and beyond at this time. In 2022 and after, ITC is no longer available so the best time to install is now.
For Commercial Buildings
Similar to residential solar, commercial businesses will get 26% tax credit on the total cost of installation, however, they do not include state incentives in the calculation. That means on a $20,000 system, they will get 26% of $20,000 regardless of any additional state rebates or deductions.
The credit is taxable income though, meaning that it must be declared and taxes paid on the credit when taxes are filed. The same step-downs apply to commercial solar, with the rate dropping to 22% in 2021, however, they will still be eligible to receive a 10% credit after 2022.
Will The End Of ITC Change The Solar Market? 2020 Update
Experts don’t agree on the degree of change that will happen when ITC ends. The ITC was meant to lower the cost of installation and encourage people to buy into solar.
When the ITC was first established the average system could cost $60,000, and people were motivated to buy because of the massive $20,000 credit. Nowadays the cost to install the average system costs less than $20,000, which is less than half the price of an old system even after the tax credit. The relatively low $3,000 tax credit likely is not the deciding factor in a person’s decision to purchase a system, meaning that the end of ITC may not affect the sales at all in the long run.
Potential Sales Inflation in 2021
However, there is evidence that the market will slow. When the ITC was last ending in 2015, sales projections fell and companies pushed to finish projects before the deadline. It is certain that 2022 sales will fall if the ITC is not renewed in 2021, since people will work hard to do their purchasing before the credit ends and inflate sales for 2021 rather than wait until 2022. Just like in 2016, though, it is likely going to normalize and continue to grow.
State Incentives Remain
It’s also important to note that states will still have their own incentives in place, and with some states like California moving in a direction of writing legislation to require solar and zero net energy homes, the federal ITC may not matter to people at all.
FAQs about ITC
Will ITC be renewed by Congress?
At this time it seems unlikely. There was an attempt to extend it in 2019, but it never made it to a vote. There are many congresspeople who are arguing in favor of extensions, citing the jobs created and explosion in renewable energy production, however, as of March 2020, no bills have been proposed.
How do I claim ITC?
Although it is always best to talk to a tax professional, the forms required to file for the credit are easy to fill out and should be completed when you file your federal tax return. You can fill out and file IRS Form 3468 here.
What can I claim ITC on?
A solar installation that started construction before 2022 for residential applications, or commercial installations which started construction before 2024. You must be able to prove that work has begun and that work is continuing, or that the solar array is fully operational.
Can you receive tax credits if you lease the solar panels?
No, the company that owns the panels will receive the credits, although many companies do pass the savings to you.