Get Ready for Changes in the 30% Solar Tax Credit—It’s Dropping
Written by Chris Meehan
Updated March 12, 2020
10 minutes read
The Investment Tax Credit (ITC) for solar power has been in the news a lot lately. On April 4, more than 100 Representatives called for legislation to extend the ITC as part of an effort to fight climate change. On the same day, Pennsylvania Rep. Mike Doyle (D) introduced a bill that would allow the ITC to cover energy storage as well. It is perfect timing since the 30% tax incentive for solar is set to begin sunsetting at the end of 2019.
There’s good reason to extend it, too. The ITC has helped lower people’s energy costs across most of the US and helped the industry experience a 50% compound annual growth rate. It has expanded access to low-cost rooftop solar power as well, creating hundreds of thousands of jobs in the process—more than paying for itself over the years. All of which has helped drive down the cost of solar power for everyone.
But now the popular incentive is facing its latest inevitable end. Over the next few years will steadily drop for homeowners until it phases out in 2022.
What is the ITC?
The ITC, as of 2019, allows everyone in the US installing solar power to take a 30 percent credit on their taxes for the cost of the solar system and related materials. This includes home solar, solar for businesses and solar for utilities. So if a solar system cost $15,000 you can deduct $5,000 of its costs from your taxes.
The ITC was created back in 2005 by the Energy Policy Act of 2005 and was originally slated to end in 2007. It was a popular program and was extended in 2008 as part of the national recovery efforts started under President Obama.
Image source: Seia
Under that extension, it was set to end at the end of 2016, but its popularity once again led its continued extension. Now it lasts through 2022 for most residential solar.
Is there an income limit for the solar tax credit?
The 30% ITC covers almost all solar systems and doesn’t depend on your income. Whether you’re buying a two-panel solar array or a 25-megawatt system, the ITC will still allow the project owners to deduct 30% of the purchase value from their taxes. If the ITC deduction value is more than what the filer owes in taxes, they can deduct whatever credit value is left from the purchase in future years.
So if you are eligible for an ITC of $4,000 but owe the IRS $3,000 the year you install solar, you can only claim a $3,000 ITC. But the next year you could claim the remaining $1,000 credit on your taxes. TurboTax has a nice explanation of it here: https://turbotax.intuit.com/tax-tips/going-green/federal-tax-credit-for-solar-energy/L7s9ZiB4D.
However, 2019 is the last year to qualify for the full 30% ITC. Starting in 2020 homeowners will only qualify for a 26% ITC, and in 2021 it falls to 22%. After that homeowners won’t qualify for the ITC at all, but commercial solar will qualify for a 10% ITC after 2022. So it really is the best time to consider going solar if you want the best tax incentives.
How do I know if I qualify for the solar tax credit?
Construction of the solar system must begin by Dec. 31, 2019, to qualify for the full 30% ITC. In addition, you must own both the solar system as well as the home or property it's installed on.
That said the ITC is a nationwide program and almost everyone installing solar can benefit from it, even if not directly. Some entities like nonprofits and municipalities may not qualify for it directly but can get it through a third-party ownership arrangement like a power-purchase agreement, where the TPO owns the array and they share the benefit of the ITC. Similarly, homeowners who go solar through a third-party will share the benefits of the ITC. Learn more about how to get the ITC here.
There are also lots of local incentives from states, counties, utilities and more. So even if you go solar after 2019 and the credit isn’t extended, you can still qualify for incentives, like solar net-metering, to help reduce the cost of solar further. The best way to find out about such incentives is by finding qualified local solar installers, like those available at SolarReviews.com.
Will the changes to the ITC impact the solar industry?
“It already is impacting our business but as of right now it's impacting us favorably,” Green Solar Technologies Chief Operating Officer Edward Harner explains to SolarReviews.com. Green Solar is a California-based national solar installer and one the most reviewed solar installers with a high ranking from customers, allowing it to achieve Pre-Screened Solar Pro status with SolarReviews.com. “Our solar consultants let homeowners know that the perfect time to go solar is right now and if they wait any longer, the ITC is going to start being reduced.”
“Now as far as how it will impact us in the future. I think that the reductions are minimal and enough—at least in the next couple years—to not impact us terribly,” Harner continues. He anticipates that the continued electric rate increases and the price drops in solar equipment will mean that solar power will still be cheaper than electricity from utilities, even when the ITC drops.
It's not just the materials cost drops alone that will make solar attractive even if the ITC goes down or ends. “There are so many more installation companies out there and…with the competition the price for the labor has actually decreased, and part of that also has to do with all the permitting,” he says.
Image source: The Solar Foundation
Indeed, cities, municipalities, states, and utilities became more familiar with the permitting process for solar over the past decade. That’s made the permitting process cheaper, quicker and easier.
The rate of the reduction in the ITC is also important. In 2015 the ITC was slated to end at the end of the year—it was like driving a car off a cliff. Homeowners and companies across the country scrambled to go solar before the incentive ended abruptly. Afterward, the industry slowed down and jobs were lost.
“Solar job growth is closely correlated with the pace of installations,” explains Avery Palmer, senior communications manager at The Solar Foundation, which tracks solar employment across the nation. “Our latest Solar Jobs Census predicts that the solar industry will recover from the jobs losses over the past two years and experience 7 percent job growth in 2019.”
Even though the highest level of the ITC is ending in 2019, it’s more of a ramp down. That’s already reflected in the slower rates of job loss and installation figures reported by the Woods Mackenzie, Solar Energy Industries Association (SEIA) Solar Market Insight Report figures.
“It definitely is much better because we can we can plan accordingly and then really negotiate with our material suppliers and our installers or what-have-you, based on this and the maybe anticipated lower sales price that we would have to offer,” Harner explains.
Will the reduction in the ITC impact solar financing options?
Not likely. Financing options for solar rooftops have boomed over the past decade, with companies offering all sorts of no up-front cost solar systems, financing them through power-purchase agreements, solar leases and solar loans—it’s become a big business that’s attracted a lot of attention from big investors like banks and mutual funds.
Under some of those arrangements the company that finances the solar array owns it and shares the ITC incentive with the homeowner. In others, the homeowner gets all the tax credits.
Harner doesn’t think the lowered ITC rates are enough to scare off such financiers. “This minimal decrease in the ITC again…is smaller, particularly in the first couple of years until it disappears,” he notes. “It is smaller than the rising electricity costs.”
“There are more and more financing companies entering into the mix, and I know that back in the day there were much fewer to choose from. Now we get calls all the time from finance companies, and I know Wall Street is taking an active interest in it.”
What if I’m not ready to go solar yet, can I still get the ITC?
In the next few years, yes. But after that, it gets a little more cloudy. But then again, the question is, will the incentive be needed?
“The rapidly declining cost of solar energy is a very encouraging sign for the future, as well as the support from many state and local leaders who are making a commitment to renewable energy growth,” Palmer says.
There’s still hope that legislators could extend the ITC further. “Both Republican and Democratic leaders have indicated their resolve to finding solutions to our nation’s infrastructure and climate challenges,” SEIA Vice President of Public Affairs Dan Whitten says in a statement supplied to SolarReviews.com.
“SEIA is reminding policy makers, that the Investment Tax Credit (ITC) works, creating hundreds of billions of dollars in private investment and hundreds of thousands of jobs since 2006. Going forward, a tax policy that provides continued stability and investment opportunity for solar is critical. The exact structure of that tax policy can be open for discussion, but one thing we won’t compromise on is equitable treatment for solar energy, as compared with other fuels,” Whitten asserts.
It looks like the sun is shining on those efforts after Congress moved multiple actions forward to expand ITC to energy storage systems and to extend the ITC or future incentives programs in the future.