How to Leverage the Federal Solar Tax Credit

There are many ways governments can encourage job creation and green investment. However, few programs have had more of an impact on the country’s economic and environmental well-being than the Federal Solar Investment Tax Credit (ITC).

According to the Solar Energy Industries Association (SEIA),

“The ITC has proven to be one of the most important federal policy mechanisms to incentivize clean energy in the United States. Solar deployment, at both the distributed and utility-scale levels, has grown rapidly across the country. The long-term stability of this federal policy has allowed businesses to continue driving down costs. The ITC is a clear policy success story – one that has resulted in a stronger and cleaner economy.”

This article explains what the federal solar tax credit is, how it works, and why you should claim this generous benefit before time officially runs out.

What Is the Solar Investment Tax Credit?

The ITC is a federal government incentive that lets you claim a 26% tax credit with the IRS after installing any number of sustainable “green” technologies, including both solar photovoltaic (PV) panels and solar-connected storage solutions (i.e., batteries).

The solar federal tax credit is designed to lower the upfront cost of investing in green technologies. However, it differs from a traditional deduction in which you subtract the cost of your solar installation from your annual income to calculate that year’s tax liability. Instead, the ITC is a true credit that reduces the size of your IRS bill, and thus, the total cost of your green energy investment.

Calculating tax credits

How Does the Federal Solar Tax Credit Work?

Being a federal program, the ITC works the same in all 50 states, regardless of:

  • You already qualify for local or state solar incentives
  • You install the panels yourself or hire a professional
  • The installation is off-grid or connected to the utility network
  • The panels go up on your home or on a commercial property

However, if you finance your PV system using solar leases or power purchase agreements (PPA’s), you’re not eligible for the investment tax credit (or most solar incentives in general). Usually, only the PV system owner qualifies for these types of subsidies and benefits.

Here’s how the solar federal tax credit works in actual practice:

  • Step 1: Install (or commission) a PV installation and/or solar-connected batteries. Note that you’re still responsible for covering the immediate upfront cost of the installation – whether you’re using cash, loans, or some other financing method that moves you closer to full system ownership.
  • Step 2: calculate the total cost of the system (parts and labor included). Then multiply this number times the current ITC rate of 26% to determine the size of your tax credit. A PV system that costs $10,000, for example, would result in a $2,600 credit. And if you owed $5,000 in taxes for the year, your new IRS bill would be $2,400 (after applying for your credit).

The example above uses nice round numbers for clarity. But according to Consumer Affairs, the average cost for a 6 kW residential PV system hovers around $15,336. And based on these numbers, the average monetary value of the federal solar tax credit is almost exactly $4,000 ($3,987 to be precise).

But what happens if the amount of your solar tax credit exceeds what you owe the IRS?

Rollover Solar Tax Credits

Imagine that you owe Uncle Sam $1,000 in taxes for the previous calendar year. And thanks to your recent PV installation and battery system, you qualify for a solar tax credit of $4,000.

In situations like these, you are allowed to “rollover” unused credits to help pay off future tax bills – until those credits are fully depleted or the ITC officially expires (more on this later).

Blog divider

History of the Federal Solar Tax Credit

The first federal tax credit for solar was introduced under the Energy Policy Act of 2005, with an upper limit of 30%. The original version of the ITC was scheduled to expire in 2006. But Congress extended the program under the Tax Relief and Health Care Act of 2006. The ITC was extended again for another 8 years under the Emergency Economic Stabilization Act of 2008. And the program received a new extension until 2021, and then another until the end of 2023.

To understand why this solar incentive is still around more than 15 years after its introduction, it helps to look at the impact the ITC has had on both the industry and on society.

Blog divider

Impact of the Solar Investment Tax Credit

According to SEIA, the solar industry has grown 10,000% since the ITC’s introduction back in 2006. And since 2010, the industry has enjoyed an average annual growth rate of 50%.

Just to put that in perspective, the US Department of Energy reports that solar accounted for less than 0.1% of the country’s total electricity supply. By 2021, that threshold had surpassed 3%.

However, the true impact of the solar tax credit goes much deeper.

The primary goal of the ITC is to make solar more affordable for more people. Doing so helps the entire country transition to a future powered by renewables. But in addition to the immediate savings, the solar tax credit delivers to PV system owners, there’s also a compounding effect, with widespread solar adoption leading to:

  • The creation of hundreds of thousands of jobs. According to the most recent National Solar Jobs Census report from the Interstate Renewable Energy Council (IREC), the US solar industry currently employs over 230,000 people (despite a 6.7% drop in 2020 due to Covid-19).
  • Huge price drops as solar and battery technology become cheaper. According to CleanTechnica, solar PV is now 9 times less expensive than it was back in 2006. This helps to make installing PV panels more affordable for the average American homeowner, which leads to higher carbon savings for society as a whole.
  • Investment and innovation in solar panels, electric vehicles, on-site storage solutions, smart grids, and a slew of other sustainable technologies designed to help us transition away from fossil fuels.

This multiplier effect explains why Congress keeps extending the federal credit for the solar programs.

But make no mistake.

Like all incentives, the federal solar tax credit (and any relevant rollover credits) will eventually expire. The next section explains when and why.

Blog divider

The Solar Investment Tax Credit Won’t Be around for Long

The ITC is designed to reward early adopters of solar PV panels and on-site batteries so that both technologies eventually become mainstream. This transition has already started to happen as more homeowners and businesses across the country turn to solar PV and on-site storage to save money, reduce pollution, and become more energy independent.

This partially explains why the solar investment tax credit has already undergone one significant reduction – dropping down from 30% to 26% back in 2019. The program is working as intended. And moving forward, the ITC will pay out increasingly smaller rewards, following the graduated schedule below:

  • All eligible solar and storage solutions qualify for a 26% credit through the end of 2022.
  • Starting on January 1, 2023, the solar investment tax credit goes down to 22%.
  • In 2024, the ITC drops to 10% for commercial customers and 0% for homeowners.

The main takeaway is that if you don’t claim the ITC while you can, you’ll likely end up paying full price for your PV panels and batteries when you decide to make the inevitable switch.

You may be tempted to delay your purchase with the hopes of saving money as PV prices continue falling. But will those panels and batteries be 26% cheaper when you eventually buy them? And what about the many months of utility bills you’ll end up paying while you wait?

When you actually crunch the numbers, going solar and claiming the ITC normally delivers larger financial savings than delaying your clean power investment does.

Blog divider

How Do I Claim the Solar Tax Credit?

If you have already filed your own personal taxes, claiming the solar ITC is relatively straightforward. You’ll need:

  • Official receipts from your solar and/or battery installation
  • IRS Form 1040, which is the standard form for individual tax returns

As a homeowner, however, you shouldn’t have to file the above paperwork by yourself. That’s because most installers will automatically help their customers navigate the incentive and financing landscape. In fact, they are literally “incentivized” to do so since helping you fill out this paperwork moves them closer to making the sale.

As a business owner, however, you should also consult with a certified public accountant (CPA) or tax advisor. Working with a professional financial expert makes it easier to accurately claim business-specific tax benefits like deductions, amortization, and of course, the solar tax credit.

Blog divider

Need Help Claiming Your Federal Credit for Solar?

The ITC isn’t the only solar incentive out there. Depending on where you live, for example, you might qualify for other programs like net energy metering (NEM), feed-in tariffs, or any number of utility or municipal solar rebate initiatives.

However, the solar tax credit is arguably one of the most important subsidies available, given its ability to instantly reduce the upfront cost of installing PV panels or batteries by up to 26%. Better still, the solar tax credit can be combined with other local, state, and federal incentives to deliver even larger savings.

If you have questions about going solar, installing storage, or claiming green incentives, schedule a free consultation with the 365 Pronto team today.