When deciding whether or not to purchase a solar (PV) system, many financial factors come into play. Several state and local governments offer property and sales tax exemptions; some areas even have cash rebates from local utility companies ranging anywhere to 10-20% of the total system cost. Through it all, the one constant you’ll find when crunching numbers is the “federal solar tax credit”, more formally known as the Solar Investment Tax Credit (ITC).
In this article, we’ll dive deeper into the ITC, what it actually covers out of the entire cost, and what’s on the horizon for the ITC.
What is the ITC?
The Solar Investment Tax Credit (ITC) is a federal tax credit for those who purchase solar energy systems for residential properties. The credit, which is applied to a homeowner’s income tax, is equal to a percentage of the cost of eligible equipment.
Introduced alongside the Energy Policy Act of 2005, the Solar ITC was the first type of federal program incentivizing those who owned a PV system to receive a tax credit, equivalent to 30% of the cost. When first introduced, there was a cap limit of $2,000 which soon was eliminated in 2008 when the limit was extended.
From 2008 onwards, the program has continually been extended and available to homeowners seeking to reap this financial benefit. Most recently, Congress extended the ITC of 26% for two more years, before winding down at the end of 2022 and completely going away for homeowners by the end of 2023.
Judging by the way things are going, that may not be the end of it. The current administration is constantly pushing for the extension of the ITC and associated renewable energies.
How Does the ITC Work?
An easy example for a solar setup works like this: a customer purchases a complete turn-key installation from a solar installer for $30,000. That number multiplied by 26% gives your total tax credit.
$30,000 x 26% (0.26) = $7,800 tax credit
If the installation qualifies for rebates from your local utility company, that rebate amount would need to be subtracted from the total system cost before calculating the ITC credit. In the same scenario from above, if the customer received a $3,000 rebate from the power company, that amount would be deducted from $30,000 before calculating the tax credit.
$30,000 – $3,000 = $27,000
$27,000 x 26% (0.26) = $7,020 tax credit
If your solar tax credit is more than your federal tax burden, you will not be able to use the entire amount when you file your taxes. However, the remaining total can be carried over to the next year. For example, if you only owed $5,000 in taxes but received the $7,800 in solar tax credit from the previous example, you would pay $0 in taxes for the year you placed your claim and then get to reduce your next year’s taxes by the remaining balance of $2,800.
The next step for qualifying homeowners is to fill out an IRS 5695 form for the year filing taxes. The system will need to be complete and operating to be considered for a tax credit of that year.
More importantly, it’s best to consult a tax professional for guidance and specifics before purchasing a system.
What is Covered?
- The entire system of components including solar modules, mounting hardware, inverters, and associated wiring
- Labor for aseembly and installation of the system
- Energy storage batteries being change by the home’s solar power
- Any permitting/inspection/developer fees needed for the project
- Preparation to the installation site, including main electrical service upgrades
Important Note: You must be the owner of the system. That means the system must provide electricity to a personal residence that you own but can be a primary or secondary residence.
The Future of the ITC
Efforts to extend the solar ITC have accelerated in the past months and are gaining traction with Congress. With the ITC set to expire for homeowners by the end of 2023, the Biden Administration unveiled the Build Back Better bill. Among the vast infrastructure and tax proposals, the plan would extend the ITC yet again, for an additional 10 years at 30%!
Along with the extension of the tax credit, the bill is proposing a “direct pay” rather than tax offset. Along with helping middle- and lower-income Americans who are sometimes excluded because of little-to-no tax bills, this change would greatly benefit groups including churches, schools, tribal communities, non-profits, and other organizations who do not have any tax obligation.
Optimism is on the horizon for the bill with hopes for an approved vote early in the year. If the bill passes, the long-term outlook for the solar ITC will be solidified for the next 10 years and will no doubt help to lessen the upfront financial cost moving forward.
Are you interested in learning more about solar energy? Benson Electric is helping power the future of solar energy in Duluth/Superior and surrounding areas. Contact us today to get in touch with Benson’s Solar Team!