Last year, following pressure from various environmental groups and the clean energy sector, US Congress passed a two year extension of the Investment Tax Credit (ITC) program. The ITC program was established in 2006, the goal being to encourage a rapid growth in the renewable energy sector, specifically in solar power. The initiative did so by offering large tax credit incentives to both commercial and residential investors in solar energy.
The US government’s Investment Tax Credit program has been largely successful. From just 1GW of electricity produced by solar power in 2006, today the USA produces over 100GW. Whilst some argue that the ITC program must be phased out, others have (successfully) pushed for an extension. The ITC program will continue to deliver tax credits to solar investors until 2024.
The ITC program is fairly simple in its incentivization. Investors in commercial and residential solar projects can, through the national program, claim 26% of their overall installation costs back in tax credits. This will continue to be the case throughout 2021 and 2022. As of 2023, the percentage of installation costs you can claim as tax credits will fall to 22%. The ITC program will cease in 2024 for all residential builds, and will be capped thereafter at 10% for commercial projects.
In this article, we’ll walk you through all you need to know about the ITC program. Hopefully, by the end of it you’ll be equipped with the knowledge you need to begin your own ITC-backed solar installation.
What are Solar Investment Tax Credits (ITC)?
Solar power is not only more accessible, affordable and effective than ever before, it’s also more necessary than ever. With the global climate crisis in full swing – excessive wild fires, floods, hurricanes and droughts devastating the world, seemingly on a daily basis – the need for a transition to a clean-energy economy is desperate.
The Solar Investment Tax Credit (ITC) program is an initiative which was established in an attempt to make this transition more attractive to potential investors. It’s work continues to this day, and shall continue until 2024.
When you invest in the installation of a solar panel system, the ITC program allows you to claim back 26% of your entire CapEx (capital expenditures) in tax credits. There is no cap on the CapEx, provided you have the documentation to prove how much money went into the build. The ITC tax credit rate of 26% will stay fixed until 2023 (at which it drops to 22%), meaning that an average domestic solar installation of $20,000 would currently earn $5,200 in tax credits.
Tax credits are not cash. They are used to pay your taxes. If you have $100 in taxes due, for example, and you earn a tax credit worth $80, then you will be left with only $20 taxes to pay from your own pocket. But what if you earn a tax credit through the ITC which is of a value greater than the taxes you owe? In the case that you owe less tax than you earn a credit for, your taxes would be written off, and the remainder of the tax credit can be redeemed at any point over the following 20 years.
The ITC program essentially gives you a discount on your overall installation costs, meaning that a return on your investment will come sooner than it would without the credits.
Why was the Solar ITC program created?
When the ITC program was created (back in 2006), solar power was prohibitively expensive and, as such, many people were reluctant to invest in it. To mitigate the reluctance of the public and financial sector, the US government created the Energy Policy Act of 2005, which included the ITC program. At the time, the program was set to expire in 2007.
However, thanks to a huge uptake in solar investment, the program was renewed in 2006, and again in 2015. The program has proven quite successful. Since its implementation, solar prices have fallen by 90%, whilst the number of installations of solar arrays in the US has grown by nearly 10,000%. This trend is only set to continue, following the extension of the ITC program into 2023. It is estimated that the number of solar installations will grow another 56% in the coming year.
Thanks in large part to the ITC initiative, solar power in the US is now on-par with conventional energy generation.
How Does ITC Work?
Video Primer on Federal ITC
ITC for Residential Homes
If you’re looking to install solar panels on your property, the ITC program will allow you to claim 26% of your total installation costs (after any additional state incentives have been deducted). This applies to any residential project started before the end of 2022. Those started in 2023 will receive 22% tax credits, whilst those began in 2024 will (as it stands) receive nothing.
To make this easier to understand, let’s look at a specific example. If you install a standard domestic solar array on your roof, costing around $20,000 (as is average), but you received $3,000 from the state in solar incentives, then the ITC’s 26% will apply to the installation costs minus the state incentive. 26% tax credits on $17,000 would earn you $4,420.
ITC for Commercial Buildings
The ITC’s percentage is identical when applied to commercial buildings, as it is when applied to residential solar installations. However, one major difference is that the ITC for commercial projects does not take state incentives into consideration. What this means, is that regardless of how much of a commercial solar projects installation costs were covered by other state incentives, it will still remain eligible to collect the full 26% tax credits on its overall cost.
For example, a commercial building’s solar installation might cost $50,000, but they may receive $15,000 in state incentives to help cover this. Whilst for a residential build, that would mean that the ITC’s 26% only applied to $35,000 of the build, for commercial projects the ITC percentage will still apply to the full cost. For a $50,000 project, a commercial investor would earn $13,000 in tax credits (26% of $50,000).
This will continue to be the case for any and all commercial solar projects started in 2021 and 2022. In 2023, the rate will drop to 22%, and as of 2024, the ITC percentage will be frozen at a permanent 10% for commercial builds.
Will the end of ITC change the solar market? (2021)
The ITC program has been extended thrice since its inception, once in 2006, then again in 2015, and most recently in 2020. As such, it may be too early to say when (or even whether) the ITC will end. All the same, there is no consensus from experts on what will happen, come 2024, when the ITC is set to finish.
Partly, disagreement is due to the massive change in circumstances from the environment the ITC was established in, to today. When the Energy Policy Act of 2005 was passed, the average cost of a domestic solar installation could be as high as $60,000. The tax credit initiative motivated homeowners and investors to buy into solar power only because they could recoup a massive $15,600 in tax credits on such a project.
Today, however, an identical residential array may cost as little as less than $20,000, thanks to the increasing availability in resources and the improvement in solar technology. The resultant ITC on this project would be $5,200, perhaps even less if additional state incentives were used. Since the ITC would earn an investor a relatively low sum, when compared with 2006 prices, cost may no longer be the deciding factor in an investors decision to invest in solar.
Potential Sales Inflation in 2024
There is, however, evidence that the market will slow. When the ITC was last set to end, back in 2015, sales projections fell, and companies pushed to finish projects before the deadline. It is certain that 2024 sales will fall if the ITC is not renewed again before the end of 2023. This is only natural, considering that investors will push hard to complete their solar project procurement and installations whilst tax credits are still available. Nevertheless, just as it happened in 2016, the market is still likely to stabilize in time, and shall then continue to grow.
State Incentives Remain
It’s also important to note that many US states will still have their own incentives in place, even after the ITC ends. Moreover, with some states like California implementing a more cemented, legislative system of dependence on, and requirement of, renewable energy installation and zero net energy homes, the federal ITC may become less and less important, after all.
The US government’s Solar Investment Tax Credit (ITC) program was established back in 2006, extended in 2006, then again in 2015, and most recently in 2020. The program has proved remarkably successful in encouraging the growth of the USA’s solar energy sector. Today, America produces over one hundred times the amount of electricity by solar than it did in 2006. The average cost of a domestic solar array has fallen dramatically, now costing less than a third of 2006’s installation prices. Installation of solar projects, on both a commercial and residential scale, has increased by more than ten thousand percent in the last fifteen years. In addition to state incentives offered throughout the US, the ITC program will continue to incentivize solar sector growth until the end of 2023. There has never been a better time to invest in solar.
It’s hard to say whether the ITC will be renewed again, following the latest extension granted in December 2020. And yet, the 2020 extension had not looked likely, either. Pressure from environmental groups, aiming for a swift and universal transition to green energy, may still prove key in the future of the ITC.
Although it is always best to talk to a tax professional, the forms required to file for the ITC are easy to fill out, and should be completed when you file your federal tax return, following the completion of your solar installation. You can fill out and file IRS Form 3468 here.
You can claim Solar Investment Tax Credits on any solar installation started before the end of 2023 (for residential applications), or indefinitely (on commercial installations). To earn the full 26% currently offered, however, you must ensure work is started before the end of 2022. You must also be able to prove that work has begun, and that work is continuing, or that the solar array is fully operational.
No, the company that owns the panels will receive the credits, although many companies do pass the savings onto you. It may be worth shopping around for a company which does, if leasing is the route you wish to take.
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