The solar investment tax credit, aka the “solar ITC“, or federal investment tax credit, will expire1 in several years after declining in value each year.
The federal solar investment tax credit provides a credit equal to a percentage of the installed dollar value of a commercial or residential solar system.
The percentage of the credit is currently valued at 26%.2
So, for example, if you install a $50,000 commercial solar system on a building you own, you can take a dollar for dollar tax credit worth $13,000 or 26% of the cost of that system.
The solar ITC can help defray the cost of insurance for solar energy systems both large and small.
When Does The Federal Solar ITC Expire?
Commercial and industrial solar buyers will experience a declining tax benefit the longer they wait… And residential solar buyers will lose the benefit of the solar ITC in 2023.
However, commercial solar systems are not scheduled to lose the ITC entirely… Instead the commercial ITC will decline to a floor of 10%:
- January 1, 2020-December 31, 2022: 26%
- January 1, 2022-December 31, 2023: 22%
- January 1, 2024 and thereafter: 10%
Purchasers of commercial solar panels will still benefit from a minimum tax credit of 10% after 2024.
Was The Solar ITC Extended For 2021?
The ITC was scheduled to drop from 26% in 2020 to 22% in 2021.
However, the federal solar tax credit was extended at the end of 2020 as it has been extended many times…
In 2020 the Solar ITC was extended as part of the $1.4 trillion federal spending package alongside the $900 billion COVID-19 virus relief package… A previous extension of the ITC was included in the Bipartisan Budget Act of 2018.
Now, instead of dropping in 2021, the solar ITC will remain at 26% for two additional years.
The tax credit will drop to 22% in 2023 for commercial solar and eventually drop to zero for residential.
In 2024 the tax credit for commercial solar is expected to remain at 10% indefinitely.
How Does A Tax Credit Help Me?
Both a tax credit and a tax deduction can reduce your tax liabilities…
However, a tax credit is different than a tax deduction…
A tax credit offers a dollar for dollar reduction in any taxes you owe whereas a deduction reduces your total taxable income (and may change your tax bracket).
- Tax Credit Example: If you have a $100,000 salary and are in the 25% tax bracket, you will have a $25,000 tax liability. A tax credit of $15,000 will reduce the amount of tax you have to pay by $15,000… Meaning you will only pay $10,000 in taxes. Savings = $15,000 in taxes.
- Tax Deduction Example: If you have a $100,000 salary and are in the 25% tax bracket, you will have a $25,000 tax liability. A tax deduction of $15,000 means you will only be taxed on $85,000. So, if you’re in the 25% tax bracket, your tax liability will be $21,250. Savings = $3,750 in taxes.
Individuals who have significant tax appetite, such as solar tax equity investors, are eager to invest in solar projects because of the benefits of the solar ITC.
To calculate how the solar ITC may benefit your solar project, you can use the solar net present value calculator.
What About MACRS?
If you are a commercial solar developer or tax equity investor, you can take advantage of additional tax benefits through MACRS.
The federal Modified Accelerated Cost-Recovery System (MACRS) allows businesses to recover the cost of “green building” investments, such as commercial solar, on an accelerated basis.
The following chart, from The Butler Firm, shows the benefits of MACRS accelerated depreciation vs. straight line depreciation period of over 20 years.
Under MACRS, solar panels can be depreciated over as few as five years.
For equipment on which an Investment Tax Credit (ITC) or a 1603 Treasury Program grant is claimed, the owner must reduce the project’s depreciable basis by one-half the value of the ITC. This means the owner is able to deduct eighty-five percent (85%) of his or her tax basis.
You may take advantage of both the MACRS system and the ITC, and receive both a depreciation deduction of 85% of their tax basis and a credit of 26% (not an apples to apples comparison).
For more information on MACRS and solar panels, visit this page on SEIA.org.
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Footnotes
- For residential customers... However, the commercial solar tax credit is not scheduled to expire.
- The federal solar tax credit was 30% up until January 1st, 2020... Then it started to decline. Note I am not an accountant or tax professional, and don't play one on TV, so check with a tax professional and do your own research before investing in solar for the tax benefits.
