How to Calculate the 30% Federal Solar Tax Credit
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), is set to decrease at the end of 2019 and drop to 10% 24 months later.
US Solar Federal Investment Tax Credit (ITC) Cheat Sheet:
|Date Construction Begins||Date Solar in Production||ITC Amount|
(at least 5% cost of project or construction must be underway)
|1/1/2020 to 12/31/2020||Before 1/1/2024||26%|
|1/1/2021 to 12/31/2021||Before 1/1/2024||22%|
|Before 1/1/2022||On or after 1/1/2024||10%|
***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 is now enables owners to claim tax credit after the installation and construction of system is finished – as long as the system is fully operational by December 31, 2023.
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 11th, 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 2019?
According to IRS Notice 2018-59, to gain the full 30% tax credit by December 31, 2019, you must pass one of two tests:
- “Physical Work Test,” meaning proof that construction is underway.
- “Five Percent Test,” that illustrates you have 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.
Many 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 panel tax credit?
Any US taxpayer, business or consumer,who purchases a solar or solar + storage system in 2019 is eligible to receive the full 30% 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 30% ITC into consideration when calculating your lease rate, so you can still benefit indirectly.
How Do You Calculate the 30% Solar ITC?
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 solar ITC 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.
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 credit is a perfect example of innovative 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 new generation of jobs and skill sets. To learn more about how this program affects California and/or Hawaii, contact REC Solar.
Solar tax credit – everything you need to know about the federal ITC for 2019
Fundamentals of Investment Tax Credit (ITC)
Due to the approval of the 2016 federal spending bill, solar panels an affordable form of renewable energy. The bill passed by Congress, more formally referred to as the investment tax credit (ITC), allows homeowners to deduct 30% of the cost of implementing solar energy systems from their federal taxes. ITC applies to commercial and residential solar energy systems, which has made the utilization of solar energy more affordable for American citizens.
How ITC is Changing the Solar Industry in 2019
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 owner’s policies and set up of their 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 owners 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 Credit
As an owner of a solar system, tax credit can be claimed when filing a yearly federal tax return.
If using an accountant to file your taxes, make sure to let your accountant know that you are implementing solar energy on your property.
If filing your own taxes:
Check if you are eligible for ITC by making sure you are the proprietor and your federal tax liability are in order.
Complete IRS Form 5965 to validate your qualification for renewable energy credits. Add your renewable energy credit information to your 1040 form that you normal file.
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.
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