Solar Federal Investment Tax Credit (ITC)

January 27th, 2014 |

Learn About the IRS Solar Tax Credit

Learn about the federal tax rebate and IRS tax credit for businesses.

If you’re buying a solar energy system today, one of the most generous solar incentives that you’re entitled to is the 30% federal Investment Tax Credit (ITC) also known as the federal solar rebate. But not everyone who goes solar is eligible to receive business solar tax credits, and for those who do, there are different ways to calculate it. Below is a FAQ layman’s guide to the solar federal ITC and solar panel tax credit, but please confirm all of this information with your tax adviser.

What’s a Solar Tax Credit?

A tax credit is not a tax deduction. With a tax deduction, you deduct some amount off your gross income to determine your taxable base income. A tax credit is much better. It can be used to pay off your owed federal taxes. So, it’s sort of like receiving an IRS gift card. The program is also referred to as an energy investment tax credit.

Who is Eligible to Receive the ITC?

Any U.S. tax payer who purchases a solar or other renewable energy system is eligible to receive the 30% solar rebate.

However, if you installed your solar system with a solar lease or a solar PPA, then you’re not eligible, since the leasing company owns your solar system, so they will receive the ITC. But most leasing companies take the value of the 30% solar system tax credit into consideration when calculating your lease rate, so you do benefit indirectly.

How Do You Calculate the 30% Solar ITC?

ITCs
Calculating the 30% ITC differs for homeowners and commercial businesses. Homeowners calculate the 30% on the net installed cost; i.e., after you’ve deducted the value of any state or utility rebates.For example, say the total cost for your solar installation was $15,000 and you received a utility or state rebate of $3,000, your total upfront expense is now $12,000. Consequently, to calculate the 30% ITC:

30% x $12,000 = $3600 tax credit that you can use to pay your taxes to the IRS.

For businesses installing commercial solar projects, the rebate is calculated on the gross installed cost of the solar system; i.e., before deducting for any local or utility rebates. So, using the same example:

30% x $15,000 = $4,500 tax credit that your business can use toward Federal businesses income taxes.

You might think that businesses get a higher ITC formula. However, the IRS considers the $3000 utility rebate as earned income, and therefore the business has to pay tax on that $3000. For residential homeowners, the IRS considers the $3000 as a “reduction in value,” sort of like a sale discount, and therefore it is not taxable.

Is the Value of the 30% ITC Refundable?

What if you’re eligible to receive the ITC, but you don’t owe any taxes this year? Will the IRS send you a refund check for $3000, using the above example? Unfortunately, the 30% ITC is not a refundable credit. However, you can use its value for up to 5 years after installing your solar system, so you’ll be able to use it partially or fully for the following year’s tax bill, or for subsequent years.

Once again, we’re not tax attorneys, so please be sure to verify all of the above ITC information with your tax representative.

In summary, the IRS program is a very valuable solar incentive if you’re going to purchase a solar system with either cash or a home equity loan. For homeowners that finance their solar systems with a solar lease or a solar PPA, it’s indirectly included in your monthly payments.

History

The Energy Policy Act of 2005 (P.L. 109-58) created a 30 percent tax rebate for residential and commercial solar energy systems in an effort to increase federal incentives for solar power. This that applied to works conducted between January 1, 2006 and December 31, 2007. In 2006 these credits were extended for another year under the Tax Relief and Health Care Act (P.L. 109-432) through December 2008.

Post the 2008 financial collapse, the Emergency Economic Stabilization Act (P.L. 110-343) prolonged this federal solar rebate program to an 8 year extension that included residential and commercial ITC. The act also rid the monetary cap for residential solar electric installations, and permitted utilities and firms from paying the alternative minimum tax (AMT) in order to qualify for the credit.

The 2015 Omnibus Appropriations Act (P.L. 114-113) included a multi-year extension of the federal ITC. One significant change in the extension was the replacing the qualification requirement from the old “placed-in-service” to a “commence construction” standard for projects completed by the end of 2023.

Impacts of the new ITC Extensions

The ITC has resulted in an extremely effective subsidy in catalyzing rooftop and utility scale solar energy adoption across the U.S. The multi-year extension from late 2015 has caused the cost of solar to drop while installation rates and technological efficiency improve. The federal investment tax credit is a perfect example of innovative federal tax policy investing in 21st century energy system and technology.

Industry experts estimate a total of 27 gigawatts of solar energy has already been installed in the US by 2015, and predict we will have cumulatively nearly 100 GW by the end of 2020. From 2015 to 2017 there was 25% increase in the number of solar industry jobs and forecasted to increase throughout the next decade. The federal solar rebate program is proof that long-term federal tax incentives can drive economic growth, technological innovation to reduce costs, and creating a generation of jobs and skill sets.

UPDATE 12/2015: The Solar Investment Tax Credit has been extended! Learn more about how changes to the ITC will benefit commercial solar in 2016 and beyond.

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