The Federal Investment Tax Credit: How Should It Influence Your Buying Decision?
Written by Andrew Sendy
Updated March 31, 2020
As tax time rapidly approaches in the United States, many solar consumers are wondering: Can I receive any tax credits for the solar electricity system I installed or am planning to install sometime in the near future? The answer is yes but we will tell you it's probably best not to wait too much longer. The federal energy investment tax credit is about to start sunsetting, which means it won't be around for much longer.
For veterans of the solar industry, the two battles over investment tax credit (ITC) extensions first in 2008 and then in 2015-were some of the most intense policy fights the industry has ever seen at the federal level. At issue was whether or not the federal government would allow a 30% tax credit for solar to be allowed to continue, keeping in law one of the most effective spurs to the quickly growing solar industry.
Both times the credit was extended, with the last one extending the law through December 31, 2023. But the credit is set to start gradually diminishing in 2020 before hitting its expiration dates for residential and commercial solar installations in 2023. At that time, the rate drops to 0% for residential customers and 10% for commercial customers. Today, we're going to tell you exactly what the ITC is, how you can best take advantage of it and whether it should influence your buying decision.
Essentially, the ITC is a federal tax credit that reduces the tax liability for individuals and companies by 30% of the value of their solar investment. Who claims the credit differs, depending on whether the customer is residential or commercial.
Homeowners can claim their renewable energy investment on their individual tax returns, while the company that installs, develops or finances the project can claim the credit for a commercial solar system on their taxes.
As the 2015 extension is written, the 30% credit drops to 26% in 2020 and 22% in 2021. So as you can see, the time is rapidly approaching when consumers will no longer be able to take advantage of the full credit. So...how much can the ITC save you in taxes? Click here to calculate.
How can I take advantage of the ITC before it starts to go down?
The best advice we can give you at SolarReviews.com is consulting your tax professional, but we can certainly give you general guidelines on how to go about it. As the Solar Energy Industries Association says, a tax credit is a dollar-for-dollar reduction in the income taxes that a person or company claiming the credit would otherwise pay the federal government.
The first thing you need to know is that the ITC is a credit, not a rebate. What this means in practical terms is that you have to owe enough taxes to claim it. So if you were hoping to use your solar system to create a federal refund, well, you'll have to find some other way to do that. However, you can claim the credit over a number of years to reduce your income tax liability to zero if you are a low-income earner who can not use the full value of the credit in one year.
To claim the 30% solar tax credit, consumers have to add one additional form to your tax returns called Form 5695. The form allows you to calculate tax credits for a variety of qualified residential energy improvements, of which installing a solar array is but one. Then you add those results to your main return, and you'll be able to calculate how much the 30% ITC is worth to you.
(For an example of what Form 5695 looks like and your theoretical savings, we have that for you here.)
Should I allow the looming ITC reduction to affect my solar buying decision?
By now, the answer to that should be obvious: Your answer should be an unqualified, full-throated YES! After all, the longer you wait, the more chance you'll have of missing an opportunity to defray your overall installation costs by 30%.
Not only is that real savings meaning that's money you can keep in your pocket to spend on another money-saving priority (including those new energy-efficient windows you've been eyeing for a decade now, which could provide you with another tax break, incidentally) but it also shortens the payback time for your overall system. So what are you waiting for? Use our calculator to see how much you can save on a solar installation from top installers in your neighborhood there's not a moment to lose!