The federal energy Investment Tax Credit (ITC) program was extended by the United States government in 2015 in order to continue to encourage the use of renewable energy sources. Since the ITC was established in 2005, the solar industry has experienced phenomenal growth, with less than 1 GW of solar energy produced in 2006 rising to more than 100 GW today. In theory, the ITC will be phased out by 2022 because it served as a stimulus for the expansion of green renewable energy sources.
In contrast, if you begin installing solar panels in 2020, you will be eligible to receive a tax credit equal to 26 percent of the cost of the panels you purchased. Before we get into the specifics, let’s go over some of the fundamentals of investment tax breaks.
What are Solar Investment Tax Credits (ITC)?
As soon as you begin the process of installing a solar panel system, you will become eligible for tax credits when the project is completed. This credit is calculated as a percentage of your total installation costs (also known as capital expenditures or CapEx), and there is no maximum amount that can be claimed.
Current rates are 26 percent through 2020, which translates into a tax credit of $5,200 on a typical solar rooftop system costing $20,000 in the United States.
Tax credits are credits that can be used to offset your tax liability. It is distinct from a refund, which represents money that has been returned to you, and it is distinct from a deduction, which does not count toward your taxable income calculation. It is very simple to understand. For example, suppose you owe $100 in taxes and you receive a $80 tax credit. You will be able to pay off $80 of your owed taxes with the credit, leaving you with only $20 out of pocket.
A word from the experts: If your debt is less than the amount of credit you earn, you will not receive a refund; however, the credit will be applied retroactively one year and can be redeemed over a period of 20 years.
The Investment Tax Credit (ITC) is a fantastic way to encourage the growth of renewable energy because you are essentially receiving a discount on your installation costs, which increases the return on investment of the system.
Why was Solar ITC Created?
When the ITC program was established, solar energy was prohibitively expensive, and many people were hesitant to invest in it. As a result, the government devised a strategy to encourage the general public to adopt a green lifestyle. They enacted the Energy Policy Act of 2005, which included the ITC program, which was set to expire in 2007 at the time of its implementation.
However, as a result of the program’s outstanding results, it was renewed in 2006 and again in 2015. The program was extremely successful, and since its implementation, solar prices have dropped by 90 percent, while solar installations have increased by nearly 10,000 percent, and they are expected to continue to grow at an estimated rate of 56 percent per year in the future. Solar power has now reached parity with conventional power generation.
How Does ITC Work?
Video Primer on Federal ITC
For Residential Homes
In the case of residential solar, a tax credit of 26 percent of the final cost after state incentives will be returned to the customer as a refund. Therefore, if the system costs $20,000 to install but the state offers a $3,000 rebate, the tax credit will be 26 percent of the $17,000 total cost of the system.
Work on the installation must begin by 2020 in order to qualify for the 26 percent credit. It will be reduced to 22 percent if construction begins in 2021, and there will be no reduction for construction beginning in 2022 and beyond at this time. ITC will no longer be available after 2022, making now the most advantageous time to install it.
For Commercial Buildings
Commercial solar will be eligible for a 26 percent tax credit on the total cost of installation, similar to residential solar; however, state incentives will not be included in the calculation. If the system costs $20,000, that means they will receive 26 percent of the $20,000 regardless of whether or not there are any additional state incentives or deductions.
The credit, on the other hand, is taxable income, which means that it must be declared and taxes paid on the credit when tax returns are submitted. For commercial solar, the same step-downs apply, with the rate dropping to 22 percent in 2021; however, they will continue to be eligible for a 10 percent credit after that year.
Will The End Of ITC Change The Solar Market? 2020 Update
Experts are divided on the extent to which the ITC will have an impact after it expires. The ITC was intended to lower the cost of installation while also encouraging people to invest in solar energy.
Initially, the average system could cost upwards of $60,000, and people were encouraged to purchase because of the massive $20,000 credit available. Nowadays, the average system installation costs less than $20,000, which is less than half the cost of an older system, even after the tax credit is taken into consideration. It is likely that the relatively low $3,000 tax credit is not the deciding factor in a person’s decision to purchase a system, which means that the expiration of the ITC may have no effect on system sales in the long run.
Potential Sales Inflation in 2021
However, there are signs that the market is about to slow down. During the last ITC deadline in 2015, sales projections fell and companies were pressed to finish projects in time for the deadline to be reached. If the ITC is not renewed in 2021, it is almost certain that sales in 2022 will decline, as people will work hard to complete their purchases before the credit expires, causing sales in 2021 to spike rather than waiting until 2022 to do so. Similar to 2016, however, it is likely that the situation will stabilize and the economy will continue to grow.
State Incentives Remain
It’s also important to remember that states will continue to offer their own incentives, and with some states, such as California, moving in the direction of enacting legislation that will mandate solar and zero-net-energy homes, the federal ITC may become irrelevant to most people.
FAQs about ITC
Will ITC be renewed by Congress?
At this point, it appears to be unlikely. In 2019, there was an attempt to extend it, but the proposal never made it to the ballot box. However, as of March 2020, no bills have been introduced in Congress in support of extension, citing the jobs created and the explosion in renewable energy production as justifications for doing so.
How do I claim ITC?
However, while it is always advisable to consult with a tax professional, the forms necessary to file for the credit are straightforward and should be completed at the same time as your federal tax return. Here is where you can get IRS Form 3468 and complete and submit it.
What can I claim ITC on?
An installation of solar panels for residential applications that began construction before 2022, or an installation of solar panels for commercial applications that began construction before 2024. You must be able to demonstrate that the work has begun and is continuing, or that the solar array is fully operational before you can proceed.
Can you receive tax credits if you lease the solar panels?
No, the credits will be given to the company that owns the panels, though many companies do pass on the savings to their customers..