The Solar Investment Tax Credit is Scheduled to Step Down to 22% in 2021.
Recent pandemic-era proposals for wind, carbon capture, and solar federal tax incentives (including the Joe Biden plan) makes one wonder if there is time to wait to invest in solar. The recent article by The National Law Review goes into great depth about the recent proposals and future trends. “It is fair to conclude that the legislative environment created by COVID-19 has caused renewables tax proposals to be at least incrementally more robust and ambitious. What this development means in a practical sense remains to be seen.”
One thing for sure, if you invest in solar NOW, you will begin reducing your energy costs immediately and are eligible for existing tax credits. Decisions made at the federal level could take some time, and nothing is for sure as to the future of proposed plans.
- 2020: Owners of new residential and commercial solar can deduct 26 percent of the cost of the system from their taxes.
- 2021: Owners of new residential and commercial solar can deduct 22 percent of the cost of the system from their taxes.
- 2022 onwards: Owners of new commercial solar energy systems can deduct 10 percent of the cost of the system from their taxes. There is no federal credit for residential solar energy systems.
What about the tax credit for Commercial Businesses?
There are really just two requirements to be eligible for the 26% federal tax credit for a commercial business:
- Incur 5% of the cost of the project
- Cash Accounting – Simply pay 5% down by Dec 31, 2020
- Accrual Accounting – 5% down by Dec 31, 2020 AND take ownership (delivery) of 5% of the project within 3.5 months down payment.
The Solar ITC was NOT extended. The Solar Investment Tax Credit will continue to step down as previously scheduled. Home solar projects must be fully operational** by Dec. 31, 2020 to qualify for the 26% Solar Federal Tax Credit.
See our original post below for qualification guidelines of the 26% Federal Tax Credit for residential and commercial properties. The tax credit will step down again in 2021 to 22%.
Original post: Oct 8, 2019
A home solar project must be fully operational** by Dec. 31, 2019 to qualify for the 30% Solar Federal Tax Credit.
There is some misinformation regarding “Safe Harbor” that is being communicated to homeowners that are interested in solar. We want to make sure that homeowners wanting to invest in solar have the correct information. Residential home solar energy systems must be fully operational by Dec. 31, 2019 to qualify for the 30% Federal Solar Tax Credit. (Ask us about SunPower’s manufacturer rebate.) There are several steps along the way of a solar installation that could make “fully operational” impossible if started too late in the year. Factors include:
- Equipment. Experienced installers have been stocking up on equipment since the end of 2018/beginning of 2019, predicting a shortage towards the end of 2019. Anything from solar panels to racking pieces and parts could be difficult to purchase late in the year.
- Permits/Inspections. AHJ’s (authority having jurisdiction; typically the local building department) work at different paces. Some faster than others. If an AHJ is innundated with projects year-end, they may not get to yours.
- Utility interconnection agreements. Utilities also run on different time schedules, some more responsive than others. Toward the end of the year, this process could run slower.
What is **fully operational? Solar is considered “operational” or placed in service when: 1) Construction is complete 2) utility approved connecting the system to the grid, 3) preoperating tests determined the equipment works, and 4) you gained ownership of the system.
The Investment Tax Credit (ITC) is currently a 30% federal tax credit claimed against the tax liability of residential (under Code Section 25D) and commercial and large-scale utility solar farm (under Code Section 48) investors in solar energy property. In June of 2018, the IRS issued guidance/requirements for establishing the beginning of construction for solar energy projects utilizing the commercial solar Investment Tax Credit (ITC) (under Code section 48) which is similar to the guidance for the previously issued wind production tax credit. The IRS guidance notice provides two methods a taxpayer may use to establish that construction of a qualified commercial solar facility has begun for purposes of claiming the solar investment tax credit (ITC): (1) starting physical work of a significant nature (Physical Work Test), or (2) meeting the so-called Five Percent Safe Harbor test (i.e., paying or incurring five percent or more of the total cost of the facility in the year that construction begins). For further explanation of the SOLAR ITC, please see this article written by The Solar Energy Industries Association.
The “Safe Harbor” ruling only applies to commercial installations and large scale utility solar farms under code section 48. “Safe Harbor” does not apply to residential home solar installations. The Solar Federal Tax Credit for residential homeowners is 26% Jan. 1, 2020 – Dec. 31, 2020.