Overview: Solar Investment Tax Credit (ITC)
In America, the Investment Tax Credit (ITC) is a 30% tax credit for residential or commercial solar systems. The credit reduces the owner’s tax liability and had done remarkable things for solar adoption since its inception in 2006. It’s said that the 30% ITC will be going away after December 31, 2016. All is not lost, though: from January 2017 (until further notice), the Investment Tax Credit will be set to 10%.
Since the sun is the most abundant renewable energy source, the U.S Energy Policy Act 0f 2005 implemented the Solar Investment Tax Credit or Solar ITC to harness energy from the sun. The main goal of the ITC is to offer incentives for homeowners to start using solar power systems, for both environmental and financial benefits.
As per section 25D of the U.S Internal Revenue Code, solar ITC is granted to residential owners who purchase a solar power system and install it outright on their residential property. Americans are increasingly demanding the freedom to have their solar system for cleaner energy, so the government paid attention to their demands and implemented ITC for their home solar power system. However, despite the overwhelming triumph and increasing demand of the ITC, the credit value will be reduced for residential solar installations at the end of the year 2019 and unfortunately, it was also planned to be terminated at the end of 2021. Nonetheless, the Solar Energy Industries Association (SEIA) will support the legislation regarding the proposed extension of ITC benefits to energy storage.
What is the Solar Investment Tax Credit (ITC)?
The Solar Investment Tax Credit (ITC) is also known as the Federal Solar Tax Credit is the most significant incentive for solar power systems particularly for solar Photovoltaic (PV). This allows the residential owners to have a 30 percent deduction to solar energy system installation cost from his/her federal taxes, which is written under the U.S Internal Revenue Code section 25D. It also applies to both commercial solar energy systems and large-scale utility solar farms and plants (under section 48) which made the employment of solar energy more affordable for many American citizens. The credit reduces the owner’s tax liability and had done remarkable things for solar adoption since its inception in 2006.
This tax credit was implemented due to the approval of the 2016 federal spending bill on solar panels which is considered as one of the affordable forms of renewable energy. With the help of both residential and commercial Solar ITC, the U.S solar industry grew by more than 10 percent since it was implemented in 2016, with an average annual growth of 50 percent over the last decade. It was also stated that the average solar energy system shopper can save around $9,000 on the solar installation costs because of the ITC implementation.
Here’s a video briefly explaining what Solar ITC is:
The History of Solar ITC
The Solar Investment Tax Credit was originally started and established by the Energy Policy Act of 2005 and was scheduled to terminate at the end of 2007. However, the termination did not succeed due to the popularity and success of the ITC. Its success in supporting the United States transition to a renewable energy economy made it possible to have multiple times of extensions. The tax credit value started at 30 percent in the year 2016 and will continue until the end of the year 2019.
Despite the booming success of ITC, unfortunately, the percentage will be decreased to 26 percent for the year 2020 and the residential owners and commercial solar power systems can only be granted a 22 percent federal taxes for their solar system cost by the year 2021. And the ITC for residential home was scheduled to be terminated at the end of 2021 while there will be 10 percent credit remaining for the commercial solar energy systems.
How does Solar ITC works?
Here’s a short video on how Solar ITC works:
The investment tax credit is the amount of solar energy system and property investment. While a tax credit is a dollar-for-dollar deduction in the income taxes that an individual or commercial company is paying in the federal government. Residential and commercial investors are both eligible to claim the 30 percent tax credit.
As of now, the ITC is at 30 percent federal tax credit for residential tax liability under Section 25D and Solar energy commercial property and lar-scale utility investors under Section 48.
In section 25D, it allows the homeowners to apply the credit to their income taxes or federal taxes. This will only be credited if the homeowners purchase a solar power system and installed it in their residential home property. Whereas, in Section 48 the business or establishments which install and finances the solar energy project will be able to claim the credit.
Also, commercial and large-scale utility projects which have launched the construction before the end of December 2021 are still qualified for the 30 percent, 26 percent or 22 percent of ITC if and only if they are already in service before December 31, 2023.
How to claim the Solar ITC?
There are three simple steps to claim the ITC for solar. First is, determine if you’re eligible for the ITC. You are eligible for the Solar Investment Tax Credit (ITC) as long as you own solar energy systems. Even if you have no enough tax liability to claim the credit in one whole year, you can “roll-over” the remaining credits so you can receive its full benefits for the upcoming years, for as far as the tax credit is still effective. However, before inquiring regarding the solar ITC, check if you sign a lease with a solar installer because if you signed on PPA, you will not be eligible to claim the tax credit because you are not the owner of the solar energy system.
After you determine your eligibility, you can start to claim the Solar ITC when you file a yearly federal tax return in the government. You will need to complete the IRS form 5965 to comply with the requirements and to know if you’re qualified for renewable solar energy credits. On the other hand, if you have an accountant responsible for holding your taxes, inform your accountant that you are implementing solar energy to your residential property.
The Impact of Solar ITC
The Solar Investment Tax Credit is considered as the most vital federal policy approach to give incentives for US citizens to have a cleaner source of energy. The employment of the solar energy system is rapidly but intensely growing for both residential and commercial utility-scale all over the country.
Moreover, ITC caused an extremely effective result in subsidizing American citizens for installing a rooftop solar energy power system, including the solar adoption of larger utility-scale across the United States. The yearly multiple extension of ITC impacts the solar industry as the cost of solar energy systems decreased while solar installation rates had grown intensively and its technological efficiency significantly improved.
The solar industry experts estimated that there are a total of 27 gigawatts of solar energy installed in the US by the year 2015 and it was also predicted that it will cumulatively grow by nearly 100 gigawatts by the end of 2020.
Besides, from the year 2015 to 2017, there was already a 25 percent increase in the number of solar industry employments and estimated that it will grow more in the next coming years.
This federal solar program testifies that long-term federal tax incentives can cause significant economic growth, increase in jobs employment and technological innovation to reduce solar power system costs.
The Future Ahead for Solar ITC
The demand for solar energy continued to increase which made the experts began to analyze the owner’s policies and set up multiple extensions of the ITC in utilizing solar energy systems. However, in spite of this higher demands, the ITC still stepdown and planned to reduce the tax credit rate for both commercial and residential. This credit rate reduction is unfortunate to the solar energy industry for it can also reduce the number of solar consumers and investors. For a quick overview regarding this reduction, for a $40,000 residential solar plus the storage project, the tax credit from 30 percent drop to 26 percent in 2020 will only reduce $1,600 in your tax credit.
The only hopeful thing with this ITC stepdown from the perspective of solar and energy storage developers and investors is that fewer incentives always make more mandatory buying. Most potential customers are more obliged to quickly commit to a solar project to get the full 30 percent ITC before the end of this year. And this will repeat for the upcoming tax credit tier step-down next year to capture the 26 percent and so on. With this issue, the demand will increase more and there will be a large influx of solar projects to be constructed by the end of the year 2021.
On the other hand, the developers of the solar energy system might take advantage of this tax credit reduction by increasing the prices of these solar systems because of the higher demand.
Reviews on Solar ITC
Solar Federal Tax Credit Explained
Tim Marquez made a short video content reviewing what Solar Investment Tax Credit is really all about, how it works and how can you claim the tax credit.
HahaSmart’s Solar News Episode 04: ITC Extension
HahaSmart YouTube channel explains the extension of Solar ITC.
Solar Energy Tax Credit
Related articles on SolarFeeds Magazine
Last week, Congress took the opportunity to create jobs and toreinvigorate both our manufacturing base and seize new export markets by passing the extension of the Section 1603 Treasury Grant Program, which allows renewable energy developers to claim tax incentives directly.The extraordinary worldwide growth in clean energy investment over thepast five years has been defined by a simple fact: Where supportiveclean energy policies are adopted, investment follows. Time and again,it has been shown that nations with the strongest policy frameworks have attracted the most capital and enjoyed the associated economicbenefits, including job creation. In fact, our new report, Global Clean Power: A $2.3 Trillion Opportunity, underscores the critical connection of government policy to private investment.
The report, with data compiled by Bloomberg New EnergyFinance, looks at three policy scenarios that will influence cleanenergy investments over the next decade. In every G-20 country, thosewith strong clean energy policies, such as renewable energy standards,realize significant private investment in clean power technologies –wind, solar, biomass, small hydro, geothermal and marine.
The United States is among those countries with the most to gain from passing strongclean energy policies. For example, the United States has the potentialto attract $342 billion in clean power project investments over the next 10 years under the Enhanced clean energy scenario(policies greater than the promises made in Copenhagen). That would be40 percent ($97 billion) higher than investment under the Business-as-usual scenario (current policies). Only India and the United Kingdom have the potential to increase investments at a higher rate.
Global Clean Power documents how energy demand and strong clean energy policies will shift the center of gravity for clean energy investment from the West (Europe and the United States) to the East (led by China and India) over thenext decade. The question is: Why would the United States choose to getleft behind by not acting now to extend tax credits for the burgeoningclean energy sector?
The clean energy race is being led by China, according to our report.
In fact, China maintains its global leadership position and has the potential toattract cumulative clean energy asset investments of as much as $620billion over the next 10 years. India is the emerging clean energy powerhouse and could realize a 763 percent increase in investment under the Enhanced clean energy policy scenario, representing the most significant growth rate among G-20 members. (See chart on how investment grows with stronger policy.)
Our findings are a wake-up call to U.S. policymakers. We are at acritical crossroads – lacking ambitious policies, the United States islikely to be become a technology taker, not a technology maker.
Without reliable, long-term and predictable tax incentives and/orready access to low-cost capital, the United States and its clean energy industry will see its competitive position erode even further.Extending the Section 1603 tax credit program is a step in the rightdirection, but only the first of many steps required by policy makers.
Read the entire report, including other key findings, country profiles, interactive graphics and video at www.PewEnvironment.org/CleanEnergy. The report is the source of the two charts in this post.
By guest blogger Phyllis Cuttino, director of the Pew Climate and Energy Campaign
Leaders of the U.S. solar industry will have one last shot at convincing the current Congress to extend a key federal solarincentive before a new Republican-controlled congress takes over at thebeginning of 2011. Most indications are that the solar grant option —which has for the past two years provided cash grants worth 30 percent of commercial solar energy system costs — will sunset at the end of 2010, as scheduled.
It’s not over ’til the fat lady sings, however. During a lame-ducksession of Congress, lawmakers will debate whether to extend the grant.If it’s not renewed, the grant will revert to a tax credit, also worth30 percent of system costs. Because cash is more valuable than a taxcredit — particularly in slow economic times — the solar grant hasproved to be a real boon for renewable energy projects and green-jobscreation.
Supporters of the cash incentive say it helped install roughly 1,000megawatts (MW) of solar-electric capacity in the U.S. this year, andhelped generate enough clean energy to power 220,000 average Americanhomes. According to the Solar Energy Industries Association (SEIA), thecash incentive has helped finance over 1,300 renewable energy projectsin 41 states.
The incentive is extremely important to the growth of the cleanenergy industry in the U.S. Cash appeals to lenders and investors whoare thinking about funding solar projects, and an extension, makesfinancings “easier and cheaper,” according to First Solar’s spokesmanAlan Bernheimer. In 2010, the U.S. was able to install more than doublethe amount of solar capacity installed during 2009 — and triple of what was installed in 2008 — thanks largely to the federal solar grantprogram. Without the cash incentive, project developers will have tolook for investors who want to offset taxable income with tax credits —an approach called “tax equity” financing. In a weak economy — like that of 2008-09 — those investors are few and far between.
Solar energy project finance lawyer Keith Martin believes there’s a40 percent to 50 percent chance of extending the cash incentive duringthe lame duck session. If it is extended — which unfortunately seemsunlikely — it will likely be part of a larger bill that will extend most of the tax cuts implemented by President George W. Bush.
Congress has already begun its session — we’ll be sure to pass alonginformation relative to the incentive program as we learn more.