As we near the end of 2020, there is a marked increase in the demand for solar installations in order to claim the fading ITC tax credit of 26%. This will create challenges for the supply chain as they try to keep up with this year-end surge in demand. Timing is everything.
WHAT IS THE ITC TAX CREDIT?
Under section 25D of the Internal Revenue Code (IRC), homeowners are allowed to claim an Investment Tax Credit (ITC) for a percentage of the “qualified solar electric property expenditures” made during a given year. The tax credit is a dollar-for-dollar reduction of the income tax liability that a taxpayer owes the federal government.
WHO CAN CLAIM IT?
Homeowners must own the solar energy system in order to claim the ITC credit. They can pay cash or finance the installation with a loan, but cannot enter into a lease or power purchase agreement (PPA) for the energy produced by the system. In these circumstances, the ITC tax credit would belong to the company providing the system.
BRIEF HISTORY AND CURRENT TAX CREDIT PERCENTAGES
The ITC first appeared as part of the Energy Policy Act of 2005 and was set to expire two years later at the end of 2007. Congress has extended its expiration several times. Currently, a declining percentage of the solar investment tax credit can be claimed by homeowners through 2021. Specifically:
2020: Homeowners of new residential solar can deduct 26 percent of the cost of the system from their taxes.
2021: Homeowners of new residential solar can deduct 22 percent of the cost of the system from their taxes.
2022 and beyond: There is no federal credit for residential solar energy systems.
WHAT SYSTEMS QUALIFY?
To qualify for the federal ITC tax credit:
The system must be placed into service before the end of the tax year in which the credit is claimed.
The solar system must be installed on a property “located in the United States and used as a residence by the taxpayer”. This terminology allows second homes to qualify for the tax credit as long as the homeowner lives there for part of the year.
The ITC credit includes new home purchases that include solar. The home builder can provide a reasonable allocation amount for the solar system or the homeowner can “use any other reasonable method to determine the cost of the [solar] property that is eligible” for the credit.
Besides the federal ITC tac credit, there are state, municipal, and utility incentives available to help promote the adoption of solar energy. The foremost collection of information is the Database of State Incentives for Renewables & Efficiency. DSIRE is the most comprehensive source of information on incentives and policies that support renewables and energy efficiency in the United States. Established in 1995, DSIRE is operated by the N.C. Clean Energy Technology Center at N.C. State University.
Some of the available solar tax credits, rebates, and incentives include:
Federal Investment tax credit
The residential tax credit for 2020 is 26% of the cost of the solar system. It will reduce to 22% in 2021, and will no longer be available starting in 2022.
State tax credits
Some states offer additional tax credits, similar to the federal ITC, for installing a solar energy system.
States, municipalities, and utility companies, that want to promote solar energy, may offer cash rebates.
Solar renewable energy certificates (SRECs)
Utilities will buy a homeowner’s solar energy in the form of SRECs to meet state-mandated percentages of clean energy production.
Performance-based incentives (PBIs)
This kilowatt-hour based incentive pays solar energy system owners for the electricity that their systems produce.
These solar loans may be offered by the state or a utility company at a reduced interest rate.
Some states and municipalities exempt solar system installations from the state sales tax and/or the property’s tax assessment.
SPEED IT UP
As time is tight, there are a few things you can do to help get your solar system “placed into service” before the end of the year:
Keep it simple. Don’t spend time trying to eke out every last kW from your roof. Straight forward array layouts will keep the process moving quickly.
Don’t reinvent the wheel. Permit packages for typical residential designs can be documented in just 1-2 days.
Contact your permitting jurisdiction and utility company as soon as possible for each of their requirements.
Expedite it. If your jurisdiction offers an expedited permitting process, follow it. Coloring outside the lines can slow you down.
Get professional help. Consider hiring an installer or licensed electrician. Their knowledge and expertise can save you valuable time.
Disclaimer: The solar team at Renvu are not tax experts. Please consult your tax advisor before deciding which tax credits are applicable to your situation.