Solar tax credit

While the solar tax credit has made solar significantly more affordable for homeowners, it will begin to decrease in 2020. We’ll show you how much you can save with the solar tax credit, what’s changing, and how these changes could impact the US solar industry.

What is the solar tax credit?

Last updated on August 8, 2019 by Evan Nicoles

The federal solar tax credit, formally known as the solar Investment Tax Credit (ITC), is a credit equal to 30% of the qualified system costs of installing a photovoltaic (PV) solar system. The ITC was established as a part of the Energy Policy Act of 2005 in an effort to boost the US renewable energy market.

How does it work?

The total value of the solar tax credit can easily be calculated by taking 30 percent of the solar system installation cost. There is no limit to the value of the credit.

If your residential solar energy system costs $20,000 and is installed in 2019, your tax credit would be $20,000 x 30% = $6,000.

It’s important to note that the federal solar tax credit is a nonrefundable tax credit. This means that you only get a refund up to the amount you owe in federal taxes.

If you owed $5,000 in federal taxes and had a $6,000 solar tax credit, you would take $5,000 of the credit in the first year, and then carry over the remaining $1,000 of the credit to the following taxable year.

The solar tax credit is only available for the owner of the system. Therefore, homeowners with a PV system through a Solar Lease or PPA (Power Purchase Agreement) are not personally eligible for the solar ITC.

 

See how much this incentive will save you!

 

Solar tax credit step-down

Residential Solar Tax Credit Stepdown
Commercial Solar Tax Credit Stepdown

Solar tax credit calculator


How do I claim the credit?

Residential Graphic

Residential

You can claim the solar tax credit for a residential solar panel system using IRS Form 5695 (Residential Energy Tax Credit) when you file your taxes.

Detailed information about Form 5695 can be found on the IRS site here.

The home served by your solar PV system does not have to be your main home.

Commercial Graphic

Commercial

You can claim the tax credit for a commercial solar panel system using IRS Form 3468 (Investment Tax Credit).

Detailed information about Form 3468 can be found on the IRS site here.

Note: We are not tax professionals. For formal advice regarding the solar tax credit, consult with a tax professional.

Upcoming changes to the solar tax credit

Per Notice 2018-59, the IRS gave guidance on the Consolidated Appropriations Act, 2016 which lays out the following schedule for the ITC:

Solar tax credit schedule

Date construction begins Residential credit Commercial credit
Before 1/1/2020* 30% 30%
1/1/2020 - 12/31/2020* 26% 26%
1/1/2021 - 12/31/2021* 22% 22%
On or after 1/1/2022 0% 10%

*Must be placed in service before 1/1/2024

How could these changes to the ITC impact the cost of solar?

There's a publicly available data set which includes historical pricing of installed solar systems. This data set covers an estimated 81% of US solar systems and is released annually in the Lawrence Berkeley National Labs (LBNL) “Tracking the Sun” report. Solar-Estimate has used this pricing data to show how past economic trends may impact the future.

From this point forward in the solar pricing analysis, there will be references to two different solar prices:

  • Gross price: The price of solar before the federal solar tax credit is applied.
  • Net price: The price of solar after the federal solar tax credit is applied.

Estimated prices of residential PV solar systems

The graphs below are showing the annual median gross price per watt and the annual median net price per watt from 2001-2024. Values for 2001-2018 are taken from the Berkeley data mentioned above, and values for 2019-2024 are projected by using a trendline based on years 2015-2018.

US Residential Solar - Median Price per Watt

US Residential Solar - Median Price per Watt

US Residential Solar - Median Price per Watt (Zoomed)

US Residential Solar - Median Price per Watt (zoomed)

Based on the pricing data shown in the graphs, the best time for a residential consumer to go solar is in 2019. Including the federal solar tax credit, the net prices for residential solar systems are as follows:


Projected net prices 2019-2022

Year Residential credit Net price
2019 30% $2.21 - 2.45 / watt
2020 26% $2.21 - 2.47 / watt
2021 22% $2.22 - 2.50 / watt
2022 0% $2.70 - 3.07 / watt

Key findings

There are two important takeaways from this study:

  1. The best time to go solar is in 2019.
    • Solar is now cheaper than it has ever been, and 2019 is the last year to claim the full 30% tax credit. While our projection suggests the net price of residential solar will be equal in 2020 and 2019, this is just an estimate and is subject to error.
    • As a general rule of thumb, any financial advisor will agree that the best time to make a long-term financial investment is as early as possible.
    • It’s reasonable to expect the solar installation market to become extremely busy as 2020 approaches - perhaps to the extent that not all interested consumers can be serviced in a timely fashion!
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  2. The net price in 2020 is not going to be significantly higher than it is in 2019.

    Based on the projected trendline, there may be no difference between the net price of solar in 2019 and the net price in 2020. If going solar in 2019 is not a financially viable option, the industry is not going anywhere and it will still be possible to get a good net price in 2020.

New legislation to extend the solar tax credit

The Renewable Energy Extension Act of 2019 was introduced in the House and the Senate on July 25, 2019. Currently, the bills are in committee, so there is no exact timeframe of when they will reach the House or Senate floor for a vote. The solar tax credit would follow the schedule below if the legislation passed:

Proposed solar tax credit schedule

Date construction begins Residential credit Commercial credit
Before 1/1/2025* 30% 30%
1/1/2025 - 12/31/2025* 26% 26%
1/1/2026 - 12/31/2026* 22% 22%
On or after 1/1/2027 0% 10%

*Must be placed in service before 1/1/2029

 

Find out how much the federal solar tax credit could save you

 

 

 

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