Federal Solar Tax Credit (ITC) – Everything You Need to Know

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The solar industry has, for almost its entire existence, been aided by generous tax credits offered by the federal government. When homeowners first entertain the idea of installing solar panels, they immediately start to research what rebates and tax incentives are available to them.

The first iteration of the Federal Solar Tax Credit was created through the Energy Policy Act of 2005. It was then extended to 2007 and then extended a couple more times to 2016. In 2016, it received a 5 year extension with the following tax credit breakdown:

From 2016 to 2019, the investment tax credit (ITC) was at an astounding 30%. It was scheduled to fall to 26% for 2020 and then 22% for 2021 before expiring. Luckily for anyone considering installing a solar system, the ITC (investment tax credit) of 26% was extended to the end of 2023 as a provision in the December 2020 COVID Relief package spending bill. The 26 percent rate was also extended into 2021 and 2022.

This is great news! But how does it all work?

How the Federal Solar Tax Credit Works

The Solar Investment Tax Credit is basically the US Government saying, “Hey, if you install solar panels on your home, we will reduce your taxes by 26% of whatever you pay for the installation of that solar energy system.”

This tax credit is essentially a delayed 26% discount on your solar system and installation. You’ll have to pay the full cost up front (or take out a solar loan for the full amount) but come Federal Tax Day (April 15), you reap the full 26% discount.

A 26% discount on anything is an incredible deal, but when we’re talking about a $10,000+ solar energy array, it becomes even more incredible.

Now, you may be asking: “What if my tax bill isn’t as high as the 26% investment tax credit (ITC)?” And that’s a great question. If your incomes taxes for the year are less than 26% of the cost of your solar system, then you are able to roll it forward. The Internal Revenue Service allows you to roll the tax credit back one year and forward for the next 20 years.

Investment Tax Credit Example Scenario

Let’s say that you decide to install a 5 kiloWatt solar system on your home. The average cost per watt for solar energy systems in the United States is $2.81. That means a 5,000 watt system will cost $14,050. This includes the panels, mounts, inverters and installation. You can find a full cost breakdown on our residential solar costs page.

With the 26% credit for residential solar installs, you are eligible for a $3,653 solar ITC.

Now let’s say your income is $65,000 per year. That means your 2021 federal tax liability will be around $15,000. But when you apply that tax credit to your federal tax return, it’s reduced to $11,347.

Is the Solar Investment Tax Credit (ITC) Refundable or Nonrefundable?

Unfortunately the solar tax credit is nonrefundable, meaning that if your tax liability is less than the amount of the credit, you will not be sent a check for the difference. Luckily the credit lasts for 20 years, so you should have no problem being able to take advantage of the full amount.

Solar Financing (Loans, Leases & PPAs) and the Federal Solar Tax Credit

You may be wondering at this point whether you can take advantage of the solar tax credit even if you aren’t paying cash for your solar energy system. If you are taking out a loan, then yes you are absolutely eligible for this tax credit for solar energy. If you are signing a solar lease or Power Purchase Agreement than you will actually not be able to take advantage of the tax credit to reduce the cost of solar.

This is because the solar tax credit is reserved for whoever is putting up the capital to put in the solar installation. The biggest bottleneck to wider adoption of solar is that the up-front cost is very high and the returns aren’t realized until many years in the future. The solar ITC was created to spur on the growth of clean energy in the United States by reducing the burden on those providing the capital for solar panel projects.

So if you lease or sign a PPA, the company that installs the system reaps the benefits of the tax credit. This is a big reason that large residential solar leasing companies are able to make a profit.

This is a big reason why, when it comes to solar financing, we recommend looking into long term loans rather than signing a lease and losing out on the reduced income taxes.

More Info On Renewable Energy Tax Credits

These solar ITC options are available both for residential solar projects and commercial solar projects. As mentioned, they are in place to help reduce the burden of the up-front cost of solar to encourage companies and homeowners to install solar energy systems.

I think everyone realizes that energy policy in the United States has a long way to go. Energy costs are low right now but we are still completely reliant on finite resources that spew greenhouse gasses into the atmosphere and widely contribute to climate change. In order to really take advantage of renewable energy, programs like this solar ITC are needed to spur long-term growth.

These ITC solar tax credits options apply to solar power, offshore wind, and energy storage. The solar industry has ultimately benefited hugely from these solar ITC extensions and should continue to grow in the near future. The only issue is that reliance on gigantic tax breaks are not sustainable enough to make going solar an attractive option for everyone. The solar industry will need to continue to innovate and ensure that going solar is really the only option we have.

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