Solar Tax Credit – Does it really help to reduce your solar cost?

According to the IRS [1], A tax credit or deduction can change the amount of tax you owe to the government, and hence you pay less. In simple terms, a tax credit means a dollar-for-dollar reduction of the income tax you owe to the federal government.

Solar Investment Tax Credit.

The US government introduced the Solar tax credit or otherwise known as the Solar investment tax credit (ITC) in 2006; since 2006, any individual who files a federal income tax can claim a credit on their income tax for a percentage of the cost of a solar energy (PV) system. The system must be installed and generating electricity in the current year.

Solar Tax Credits
Solar Tax Credits – Does it work?

The solar investment tax credit (ITC) applies to both residential and commercial systems. In 2021, the ITC allows you to deduct up to 26 percent of the system’s total cost, including the cost of the Solar equipment and the system’s installation cost.

History of the ITC

According to SEIA [2], the Energy Policy Act of 2005, signed into law by President George W. Bush, authorized the initiation of tax credits for wind and alternative energy suppliers. In addition to this, it required all public electric utilities to offer net metering at the customer’s request. The policy created a 30% tax credit for solar and other alternative energy systems for residential and commercial properties.

Initially, the US congress wanted the policy to expire at the end of 2006, but the program’s success made Congress extend in 2006 and subsequently in 2008 for eight years. Per the original policy, 30% of the Investment Tax credit was in place through 2016 and further extended to 2020.  At the end of 2019, the ITC was extended, but with a step-down provision:

All eligible systems will get 26% for solar (PV) systems In 2021 and 2022, followed by 22% in 2023 and 10% in 2024.

Solar ITC Schedule

Benefits of ITC

As per SEIA[3], ever since the Investment tax credit came into place in 2005, the Residential and Commercial solar industry grew by more than 10,000%, with an annual average growth rate of 50% since 2010. For commercial properties, Solar (PV) Installation should “commence construction.” Ever since the federal government instituted the Solar Tax Credit (ITC), it has been one of the most critical levers in driving growth in the renewable energy space. The Solar Tax Credit (ITC) provides stability and investments in the solar (PV) space for companies to develop long-term investments that foster competition, which leads to technological innovations and, in turn, leads to lower costs for consumers, which leads to more significant growth.

Eligibility for Homeowners and commercial

The Federal Solar Tax Credit (ITC) is set at 26% for 2021 and 2022. Accordingly, any residential or commercial customer who wants to invest in a solar energy system will be eligible to receive the 26%. Section 25D, under the IRS Code, allows residential homeowners to apply the 26% tax credit to their personal income taxes. This credit will only be applicable if they purchase a solar (PV) energy system for their home that they use as a primary or secondary residence. The system should be purchased and installed in the current year and generating electricity before the end of the year to claim the 26% credit on the federal income tax. The solar (PV) energy system was purchased outright with cash or through financing. Suppose the customer has a leased PV system or an arrangement to buy the system’s electricity, also known as PPA. The investment Solar Tax credit (ITC) is claimed by the company that leases the system or offers the PPA. In addition to this, the system should be purchased as new or used for the first time. Solar energy (PV) systems can be acquired inexpensively through other countries, like China and Mexico, and installed using a local solar technician, but the ITC.

Customers that purchase a new home with built-in solar (PV) energy system feature and owns the system (pre-purchase/finance) outright homeowner is eligible for the Investment Tax Credit to be applied as soon as they move into that residence

For solar projects related to commercial and utility-scale projects, construction should’ve started before December 21, 2023, to qualify for 26 or 22 percent Solar Tax Credit ITC if they generated electricity before January 1st, 2026. To verify if your commercial projects qualify for the Solar Tax credits (ITC), check out the details on guidance (Notice 2018-59) [4] in June 2018 that further explains the taxpayer’s details meets the criteria of construction of a solar project. 

Key Takeaway

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