How to Calculate the New Federal Solar Tax Credit in 2020
If you’re buying a solar energy system today, timing is everything – particularly as one of the most generous US federal solar incentives, the 30% federal Investment Tax Credit (ITC), decreased to 26% at the end of 2019 and will continue to step down every year before dropping to a permanent 10% for commercial solar systems in 2022. But not everyone who goes solar is eligible to receive the solar tax credit, and for those who are, there are different ways to calculate it.
US Solar Federal Investment Tax Credit (ITC) Cheat Sheet:
How does the solar tax credit work? There are multiple commercial solar ITC deadlines to track. To qualify for 30% credit level, work must have started by 12/31/2019, with 5% of costs incurred or with a significant start of the physical labor. All work commenced in 2020 qualifies for a 26% credit level and goes down to 22% in 2021. The permanent 10% credit level starts for projects that begin construction after 12/31/2021, or are placed in service after 12/31/2023.
***Please note that this is for informational purposes only. We can not offer tax advice and all information concerning tax credits should be confirmed with your tax adviser.****
Prior to the ITC, owners of new solar panel or solar + storage systems could not claim tax credits unless their system was in full operation. The updated legislation now enables owners to claim tax credit after the installation and construction of the system is finished – as long as the system is fully operational by December 31, 2023. The commercial solar tax credit deadlines to track are as follows:
- 30% Tax Credit: Commence construction (determined by Physical Work Test or 5% Safe Harbor Test) by 12/31/2019, complete project by 12/31/2023
- 26% Tax Credit: Commence construction (determined by Physical Work Test or 5% Safe Harbor Test) by 12/31/2020, complete project by 12/31/2023
- 22% Tax Credit: Commence construction (determined by Physical Work Test or 5% Safe Harbor Test) by 12/31/2021, complete project by 12/31/2023
- 10% Tax Credit: Anything built after 01/01/2022
*Safe Harbor qualifications and dates may shift due to COVID-19.
As well as incentivizing commercial and residential solar, there are moves to extend the financial investment benefits of the existing ITC to batteries and other electric storage systems.
A bi-partisan bill called the Energy Storage Tax Incentive and Deployment Act was introduced on April 4th, 2019 as the latest update to a bill first introduced in 2016 by Sen. Martin Heinrich (D-NM). The extension would offer the same incentives and ramp down percentages as shown here for solar.
What else do you need to know in 2020?
According to IRS Notice 2018-59, to gain the full 30% solar investment tax credit, you must pass one of two tests to determine construction commencement:
- “Physical Work Test,” meaning proof that construction was underway before December 31, 2019.
- “Five Percent Test,” that illustrates you had incurred at least 5% of the total project costs by December 31, 2019. Permits, site assessments, plans, environmental impact studies — all of these costs qualify under the test.
So if you have a commercial system that met one of these two construction commencement tests by the end of 2019, you can still get your full 30% ITC – as long as you complete your project before the end of 2023.
If you missed the construction commencement deadline for the 30% tax credit, you can still take advantage of the 26% tax credit currently being offered for projects who commence construction by the end of 2020 and complete their project by the end of 2023.
Many businesses are pushing forward on projects, particularly those funded by Power Purchase Agreements (PPAs), as the step-down percentage can negatively impact financing by as much as 10 percent for projects delayed till 2022 or beyond.
The ITC can be a great financial incentive for many commercial solar (and soon storage) implementations. However, not everyone is eligible. Below, we’ve created a helpful FAQ / layman’s guide to the solar federal ITC.
Are you hoping to capture the full value of the solar ITC for your business? Contact our team of experts today for more information!
What is the Federal 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.
Do I Qualify for the Solar Tax Credit?
Any US taxpayer, business or consumer who commences construction of a solar or solar + storage system in 2020 is eligible to receive the full 26% solar ITC.
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, they will receive the ITC. But most leasing companies take the value of the 26% ITC into consideration when calculating your lease rate, so you can still benefit indirectly by having lower system payments.
How Do You Calculate the 26% Solar ITC?
Calculating the 26% ITC differs for homeowners and commercial businesses. Homeowners calculate the 26% 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 26% ITC:
26% x $12,000 = $3,120 solar tax credit that you can use when you pay 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:
26% x $15,000 = $3,900 solar tax credit that your business can use toward federal 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 26% 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 26% ITC is not a refundable credit. However, per Section 48 of the Internal Revenue Code, the ITC can be carried back 1 year and forward 20 years. This means that if you had a tax liability last year but don’t have one this year, you can still claim the credit. If you had no tax liability last year or this year, you can keep the credit on your books and use it any time you have a tax liability over the next 20 years.
Once again, we’re not tax attorneys, so please be sure to verify all of the above ITC information with your tax representative.
Impacts of the new ITC Extensions
The ITC has resulted in an extremely effective subsidy in catalyzing both 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 efficiencies have improved. The federal solar tax credit is a great example of an innovative tax policy that encourages investment in 21st-century energy systems and technology.
Industry experts estimate a total of 27 gigawatts of solar energy had already been installed in the US by 2015, and they predict we will have nearly 100 GW total by the end of 2020. From 2015 to 2017 there was a 25% increase in the number of solar industry jobs and that number is 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 create a new generation of jobs and skillsets. We offer commercial solar in 26 states, Washington D.C., and Puerto Rico, to find out more about the ITC close to you contact REC Solar today.
Solar Tax Credit – Everything You Need to Know About the Federal ITC for 2020
The growth of the solar industry is only expected to continue, as businesses look to reduce energy costs and find cleaner energy solutions. To ensure you are up to date, we have explained everything you need to know about the federal solar tax credit for 2020 below.
How ITC is Changing the Solar Industry in 2020
The Energy Policy Act of 2005 initiated the federal ITC and was to last until the end of 2007. However, due to efforts to combat climate change and voter popularity, multiple extensions were granted to prolong the duration of the ITC until the year 2016. As the demand for solar energy continued to rise, experts began to analyze owners’ policies and their setup of solar array(s). The extension of the policy has allowed for improvements of economic and environmental utilization of solar energy for consumers and suppliers alike. In late December 2015, Congress passed another federal bill that extended benefits to beyond 2022.
Qualifying for Solar Energy Credit
Any owner of a solar energy system may qualify for solar tax credit. If an owner does not have enough tax liability to claim the entire credit in one year, the owner has the ability to use those remaining credits in future years. By “rolling over” the remaining credits, the owner will be able to receive full benefits from claiming tax credits. Before inquiring about solar credit, check to see if your solar panels have been issued through a lease or PPA of installer. If the owner is on a lease or PPA, then the owner would not be eligible for tax credit due to not being the proprietor of the system.
Claiming Solar Tax Credit
As an owner of a commercial solar system, tax credit can be claimed when filing a yearly federal tax return.
When filing your taxes, make sure to let your accountant know that you are implementing solar energy on your commercial property using IRS Form 3468 (Investment Tax Credit).
Tips When Considering Solar Energy Systems
Investing in solar energy is an important fiscal decision. Business owners should research as many solar energy options as possible. For some, leasing or a Power Purchase Agreement (PPA) may be a better option for organizations with less “cash” or capital to invest.