A Guide to the Federal Solar Investment Tax Credit

It’s the best incentive in solar – but it won’t be here forever​

Clean, sustainable solar energy is good for America and the planet. That’s why the federal government and many state governments have created incentive programs to promote solar adoption and make going solar more affordable for more people. By far the most important solar incentive currently available is the Federal Solar Investment Tax Credit (ITC). Every homeowner considering solar needs to know about this incentive, which can currently allow you to knock off more than a quarter of the cost of your solar installation.

This incentive won’t last forever, though. Read on to get a rundown of what the ITC is and why you should take advantage of it while you can.

A brief history of the ITC

The ITC was originally part of the Energy Policy Act of 2005, a wide-ranging piece of legislation that was designed to reduce U.S. dependence on foreign energy sources and reduce energy prices.

At the time, the provisions related to solar in the new law didn’t attract much notice compared to those about, say, ethanol and natural gas, and it was originally supposed to expire at the end of 2007. Fortunately, because of its positive impact in spurring solar adoption, the program has repeatedly been extended by Congress, most recently in 2020 as part of economic relief during the COVID-19 pandemic.

The solar ITC has proven its value over time. Since the incentive first went into effect, the U.S. solar industry has grown by 10,000%. However, the clock is ticking for homeowners who want to take advantage of the ITC, as its future is currently uncertain.

What is the ITC?

Simply put, the ITC is a way of getting the federal government to pick up a large part of the cost of your new solar installation.

When you go solar, you can deduct 26% of the cost of your system from your federal income taxes. There is no dollar limit to the deduction: you can claim 26% whether your system costs $30,000 or $100,000. If the value of the deduction is more than your total tax liability, you can “roll over” a portion of the deduction to the following year as long as the ITC remains in effect.

If you have no tax liability, you can carry the ITC back one year or forward up to 20 years.
This means if you had a tax liability last year, but don’t have any this year, you can still claim the credit. If you had no tax liability this year or last year, you can use the credit any time in the next 20 years you do have liability.

How to Claim the Solar ITC

You claim the solar ITC by using Form 5695 when you file your federal taxes. The credit applies to the components of your solar system – like the panels themselves, mounting hardware, and battery storage if it’s charged exclusively by your panels – along with any other materials needed for the installation, the cost of labor, and the sales tax. You should note that because the deduction only applies to the costs directly associated with the solar system, if you need to replace the roof on your house as part of the process of going solar, you will not be able to deduct part of the cost of the new roof. If you have more detailed questions about how to claim the solar ITC, we recommend you consult a tax professional.

It’s also important to understand that you have to actually own your solar system to claim the ITC. Leasing a solar system, or purchasing solar energy production through a power purchase agreement, does not make you eligible.

Use it or (potentially) lose it

The solar ITC is a great money-saving incentive, but your time to take advantage of it is currently limited.

The 26% credit will only continue until the end of 2022 under the current law. In 2023, the credit will be reduced to 22%. After 2023, the credit is set to disappear entirely for residential solar systems, although a small credit will remain for commercial projects.

ITC scheduled to expire in 2023

Until Congress revised the act as part of the 2020 economic relief package, the ITC was actually supposed to phase out even more rapidly: 22% in 2021 and just 10% in 2022.

So is the ITC living on borrowed time? Not necessarily. The program was originally supposed to only last 2 years, after all, and it’s already lasted 15. Legislation has been proposed to further extend the program, and even possibly to boost the credit back to 30%, its original value (that legislation would include a provision to make the ITC value retroactive for homeowners who go solar under a lower value). However, at the moment it’s impossible to predict whether any of these proposals will succeed, or if the ITC will completely phase out as currently planned.

The bottom line is that if you’re considering going solar, it’s best for your bottom line to do so sooner rather than later. If construction on your solar system begins before the end of 2022, you’re guaranteed to qualify for the current 26% credit. If the value of the credit is actually increased by legislation that passes in the future, you should be able to claim the difference on your tax return for that year.

Ready to take action?

If you want to make sure you don’t miss out on the full value of the solar ITC, schedule a convenient remote discussion with one of our energy consultants. They can also help you understand any additional state or local incentives that may be available to help make going solar more affordable for you. Be sure to follow us on social media so you don’t miss more articles about solar incentives and changes in federal and state solar policy.

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