The tax credit for installing a solar system on your home or business has been around in some form or fashion since the Energy Policy Act of 2005. Also known as the solar Investment Tax Credit or ITC, this federal program allows anyone who purchases a photovoltaic solar system (one that produces electricity) to deduct 30% of the installed cost from one’s federal income taxes. The credit applies to both residential solar, as well as, commercial applications and currently there is no cap on its value.
The Solar ITC was originally set to expire on December 31, 2016, but in the 2016 federal spending bill approved by Congress on December 18, 2015 the solar tax credit was extended for five more years and is now scheduled to expire in 2021. One major difference this time around though is that rather than simply ending in 2021, the new version of the Solar ITC contains a step down. This means that the 30% tax credit available today (2017) will gradually be reduced to zero for residential customers over time. Here’s how the step down is structured:
- 2016 – 2019: For the first three years, the solar tax credit stays at 30% of system cost.
- 2020: The Solar ITC is reduced to 26% of the installed cost of a solar array.
- 2021: The tax credit drops again to 22% of turnkey solar cost
- 2022 and beyond: Residential solar will no longer enjoy any federal tax advantages. Commercial solar installations will still qualify for a 10% tax credit
Something that is important to understand about the Solar ITC is that IT IS NOT A REBATE. As its name implies, it is a TAX CREDIT. This means that you receive a credit against federal taxes owed to the IRS. For example, if you purchase a $25,000 solar panel system, you will receive a $7,500 credit against taxes owed. In other words, you must owe the federal government at least $7,500 (in this example) to take advantage of the full credit.
For many taxpayers, taking advantage of the tax credit is straightforward with programs like TurboTax facilitating this credit quite easily. While for others, they simply may not be paying enough federal taxes in any tax year to enjoy the benefits of this federal program. It is important that you discuss any potential tax credits with your tax adviser or a licensed professional as your situation may be unique.
The wonderful thing about the solar investment tax credit, for those who can take advantage of it, is that the federal government gives solar owners 30% equity in their solar system from day one. After all, 30% off any purchase is a substantial incentive. The check you write or the loan you take out is 30% below retail!
In today’s market, many solar financiers offer tax credit financing where they pay the solar installer 100% of the system price, but base the consumer’s monthly payments on 70% of the installed cost. This generally allows for the loan payments to be less than one’s current electric bill for those in high electric rate areas like Southern California Edison and San Diego Gas and Electric (SDGE). These programs often allow consumers up to 18 months to file for the credit and forward the refund to the finance company. Meanwhile, the solar customer has enjoyed lower payments for the entire term.
At Flex Advisers, we understand that navigating the Solar ITC can be confusing. Our experts can answer your questions and are able to provide the information you and your tax professional need to make an informed solar decision.
With the clock running out on the solar tax credit, there’s never been a better time to consider solar savings! Contact us today for a complimentary solar analysis.