It is a well-known fact that using renewable energy sources for electricity production is an ideal thing to do. There are a lot of benefits to doing this, but the biggest advantage is the fact that it will tremendously help save our deteriorating environment. Because of this, installing a renewable energy system, such as wind turbines or solar arrays, into a house or a commercial building is highly encouraged.
However, on the flip side, installing a renewable energy system also has its own big disadvantage — the cost. It is not cheap to try and install a renewable energy system, and this problem is the primary setback for many people. With that said, the government of the United States may have actually offered a solution to this problem. That solution is the tax credit, and for renewable energy, there are two tax credits to choose from. These are the renewable electricity production tax credit and the solar investment tax credit.
Renewable Electricity Production Tax Credit
What Is It?
Essentially speaking, the renewable electricity production tax credit (PTC) is a per-kilowatt (kWh) tax credit for electricity that is generated using qualified energy resources. A few examples of qualified energy resources include solar hot water heaters, solar electric equipment, wind turbines, and fuel cell property, although this tax credit is almost exclusive to wind facilities.
This tax credit does not have a dollar limit, but it is also not refundable. That said, if there is an unused portion of this credit, it can be credited to the following year’s tax return, especially if the credit is more than any tax that is owed.
Under current law, non-wind facilities, that had their construction begin before January 1, 2018, may qualify for the PTC. Beyond that time, they are not qualified any longer. On the other hand, for wind facilities, the credit is available for facilities for which construction begins before January 1, 2020. For those wind facilities that have begun construction during 2017, the credit is reduced by 20%. The credit is reduced by 40% for facilities that begin construction in 2018 and reduced by 60% for facilities that begin construction in 2019.
Achievements under the PTC
The PTC has been significant to the growth and development of renewable electricity resources, particularly wind. In fact, this policy has been so successful that it spurred the investment and the establishment of a U.S. manufacturing base that helped drive U.S. wind power costs down by 69% over the last decade. What this means is that investing in U.S. wind farms has spurred over $143 billion in private investment in the U.S. economy over the last 10 years.
Moreover, because of the PTC, the wind energy industry has been able to support more than 114,000 well-paying jobs, including many manufacturing, construction, and technical jobs, all over the country. The industry also employs veterans at a 67% higher rate than the national average, and rural landowners have received over a quarter of a billion dollars in lease payments every year for hosting wind turbines.
Long story short, the growth in the wind industry is expected to remain strong when the PTC is fully phased-out. Additionally, because the PTC has been successful in helping establish a reliable, competitive domestic wind industry, the wind will continue to expand capacity and deliver economic benefits for Americans.
Related article: An In-depth Comparison: Solar Power vs. Wind Power
Solar Investment Tax Credit
What Is It?
The solar investment tax credit (ITC), also known as the federal solar tax credit, is a tax credit that allows a taxpayer to deduct 30% of the cost of installing a solar energy system from their federal taxes. This tax credit can be applied to both residential (under Section 25D) and commercial (under Section 48) systems, and there is no cap on its value. As for eligibility, the ITC is based on a “commence construction” standard. In fact, the IRS issued guidance (Notice 2018-59) on June 22, 2018, that explains the requirements that a taxpayer must meet to establish that construction of a solar facility has begun for purposes of claiming the ITC.
The ITC was originally established by the Energy Policy Act of 2005 and was supposed to expire at the end of 2007. However, the ITC had grown extremely popular, and its success in supporting the United States’ transition to a new renewable energy economy, Congress has extended its expiration date numerous times. As of right now, the solar investment tax credit is available to homeowners in some form through 2021.
To be more specific, for 2016–2019, the tax credit remains at 30% of the cost of the system. But in 2020, owners of new residential and commercial solar can deduct 26% of the cost of the system from their taxes. This percentage gets lowered to 22% in 2021, and from 2022 onwards, owners of new commercial solar energy systems can deduct 10% of the cost of the system from their taxes. Additionally, by this time, there will be no federal credit for residential solar energy systems.
Furthermore, commercial and utility-scale projects, which have been commenced construction before December 31, 2021, may still qualify for the 30%, 26%, or 22% ITC if they are placed in service before December 31, 2023.
How Does the Solar Tax Credit Work?
So long as the homeowner owns their solar energy system, they are eligible for the solar investment tax credit. Even if they don’t have enough tax liability to claim the entire credit in one year, they can still roll over the remaining credits into future years for as long as the tax credit is in effect. The following are some of the expenses that are allowed to be claimed:
- Solar equipment
- Freight shipping costs
- Solar consulting fees
- Professional installer fees
- Electrician fees
- Engineer fees
- Tools bought or rented
- Wiring, screws, bolts, nails, etc.
- Equipment purchased or rented (e.g. scaffolding or a man-lift)
- Permitting fees
- Permitting service costs
However, one thing that should be noted is that a person is only allowed to claim the credit if they own the system. So, if a person signs a lease or PPA with a solar installer, they are not the owner of the system anymore, thus making them ineligible from receiving the tax credit. Because of this, it is commonly recommended to avoid solar leasing, if at all possible.
How Has ITC Impacted the United States?
The solar investment tax credit is one of the most important federal policy mechanisms to support the growth of solar energy in the United States. In fact, ever since it was enacted, the U.S. solar industry has grown by more than 10,000%, with an average annual growth of 50% over the last decade alone.
What this means is that because of ITC, hundreds of thousands of jobs have been created and billions of dollars have been invested in the U.S. economy. In 2015, SEIA successfully advocated for a multi-year extension for the credit. And this extension has provided market certainty for companies to develop long-term investments that drive competition and technological innovation, which, in turn, lowers energy costs for consumers.
However, even though the success and popularity of the ITC have been overwhelming, the value of the credit will, unfortunately, begin to decrease after 2019.
Our world right now is facing a critical environmental crisis, like the recent Amazon Rainforest fire – and as citizens, it is natural that we are looking for possible ways to stop this crisis before it completely destroys the planet. One of the surefire and proven ways to achieve this goal is by utilizing renewable energy sources in generating electricity. This is a recommended solution because it encourages us to stop using fossil fuels for energy generation. Thus, lowering the carbon footprint as well as greenhouse gas emissions. Aside from that, renewable energy sources are abundant everywhere, so accessing them will not be a problem at all.
However, even though turning to renewable energy seems like an ideal thing to do, it should be noted that the process is not necessarily cheap. Investing in a renewable energy system definitely costs money, and the cost is undoubtedly one of the reasons why some people choose not to install a renewable energy system instead. Luckily, the U.S. government has provided two tax credits that are aimed to help these people.
These two tax credits are the renewable electricity production tax credit (PTC) and the solar investment tax credit (ITC). Both the PTC and the ITC have proven to be incredibly beneficial to the industry of renewable energy. For one thing, they have created thousands of well-paying jobs, and for another, they have made renewable energy sources affordable for people. In fact, these two tax credits are so monumental and beneficial that they have provided critical stability for businesses and investors. Long story short, because of the PTC and ITC, the renewable energy industry has grown significantly.
However, even though both the ITC and the PTC have proven to be influential, it is still not enough to make a dent in energy production in the United States. To be more specific, solar energy still only represents 2.5% of energy production despite the ITC’s massive progress. Meanwhile, wind energy will still only account for 6%. Basically, there is still so much to do in order to make better progress in the renewable energy industry.
That is why, moving forward, a tax policy that continues to provide stability and investment opportunity for renewable energy should be a part of any national discussions about tax, infrastructure, or decarbonization.