What is the ‘Solar Investment Tax Credit’ (ITC)?
The ITC is an important federal tax policy that supports the growth of solar energy within the United States. “Since the enactment of the ITC in 2006, the U.S. solar industry has grown by over 10,000%.” The solar industry has created hundreds of thousands of jobs, as well as invested billions of dollars in the U.S. economy. Despite the overwhelming success and demand for the ITC, the value of the credit will start decreasing after 2019, unfortunately.
Quick Facts about the ITC:
1.) The ITC is a 26% tax credit for solar systems on both residential and commercial properties.
2.) The ITC is a “tax credit”, not a rebate.
3.) Congress passed a multi-year extension of the ITC in 2015, that looks like this:
How Does the Tax Credit Work?
The residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when the homeowner purchases and installs the solar system on their home.
A tax credit is a dollar-for-dollar reduction in the income taxes that a person or business would otherwise pay the federal government. The ITC is based upon the amount of investment in solar purchase. Both residential and commercial ITC are equal to 26% of the total cost that is invested in eligible solar properties which has begun construction through 20202. The ITC then decreases according to graph shown above.
Scenario: John has money deducted from his paycheck each month from his employer for federal taxes. Annually that amounts to $10,000. Each year John receives a $1,000 refund from the IRS. John financed a solar project for $30,000 which provides him with a tax credit of $7,800. Now when John files his taxes he will apply the $7,800 ITC to his net tax expense. In this scenario, John would receive a refund for $10,000.
The ITC is a non-refundable credit which means you may not apply more than what you owe in taxes. If John’s net tax expense was $4,000, he would only be able to apply $4,000 of his $7,800 ITC. The remaining $3,800 of the ITC would rollover to the following year.
What is Eligible?
The rules for residential and commercial solar are governed by two tax distinct IRS code sections §25D and §48. Under both code sections the system must be owned in order to claim the credit. Additional eligible costs can include preparation to the site where solar will be installed, such as roof repairs and tree removal for sun exposure.
We are not tax professionals and recommend that you consult your CPA with any questions you have about the ITC.
Tip:
The credits that generate with your solar system can be used as deductions in your taxes because they are considered income!
Call us and we will connect you with our solar tax consultant to answer all of your questions!