All About the Federal Solar Investment Tax Credit (ITC)
The ITC, better known as the Solar Investment Tax Credit, is a very important federal policy supporting and enabling solar energy expansion across the USA. Passed in 2006, it helped the US solar industry grow rapidly, creating jobs and injecting billions in the economy across the states.
The Solar Energy Industry Association (SEIA), a national trade association for the solar and solar storage industries, has been crucial in advocating and promoting this important tax credit and its extensions. Thanks to their efforts as well as the efforts of BrightSuite’s parent company, Dominion Energy, the ITC remains the most important federal policy mechanism supporting the growth of solar energy in the United States.
Since the ITC was enacted, the U.S. solar industry has grown by more than 10,000% creating hundreds of thousands of jobs and investing billions of dollars in the U.S. economy in the process. SEIA has successfully advocated for multiple extensions of this critical tax credit, including the most recent delay of the credit phasedown in December 2020.
Today, the SEIA is continuing its efforts to support legislation to extend Investment Tax Credit further. Click here to learn more.
Quick Facts About the ITC
The ITC (Investment Tax Credit) is a tax credit for solar systems on residential (under Section 25D) and commercial (under Section 48) properties, currently set at 26%.
The Section 48 commercial credit can be used by customer-sited commercial solar systems and large-scale utility solar farms.
The ITC enabled the 10,000% growth of the solar energy industry in the USA, since its implementation back in 2006, growing roughly 50% annually over the last decade.
In 2020, Congress passed a two-year delay of the ITC phasedown:
The Section 48 ITC is eligible on a ‘commerce construction’ standard. Back in June 2018, the IRS issued a guidance that explains all requirements that taxpayers must meet to claim the ITC, in terms of solar facilities constructions. It is important to note that this is applied differently whether the solar project is for residential or commercial use.
This 2020 ITC extension has lowered solar energy costs, as well as provided market assurance that enabled companies to promote innovation and drive healthy competition.
Despite these incentives, today solar energy only represents 2.5% of energy production in the USA.
Most solar industry professionals promote a tax policy that provides stability and investment opportunities for solar energies, especially during national conversations about taxes, infrastructure and sustainability.
How Does the Solar ITC Work?
The Investment Tax Credit (ITC), currently set at 26%, is a federal tax credit that can be claimed against the tax liability of residential (under Section 25D) and commercial and utility (under Section 48) investors in solar energy. The Section 25D residential ITC allows the homeowner to apply the credit to their personal income taxes. The credit can be used by the owner when purchasing and installing a solar energy system. As for Section 48 credit, businesses that purchase and/or finance the solar energy system can claim this credit.
A tax credit is a reduction in income tax that a person or company would pay to the federal government. The ITC is based on how much one has invested in solar energy on their property. Both commercial and residential tax credits are 26%, as long as the amount is invested in eligible solar.
A Dollar for Dollar Reduction in Income Tax
A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 26 percent of the basis that is invested in eligible solar property. The ITC will then reduce as follows:
- 26% for projects beginning in 2021 through to 2022
- 22 % for projects beginning in 2023
- After 2023, the residential credit is reduced to zero while the commercial credit moves to 10% permanently
However, for those commercial and utility-scale projects that began constructing before the end of 2023, they may be able to qualify for either the 22 or 26% ITC if placed in service before 2026. The IRS issued guidance (Notice 2018-59) on June 22, 2018 thoroughly explains all the requirements needed by a taxpayer to be able to claim the ITC for their qualified solar facility on their properties.
Solar Systems on New Residential Homes
A homeowner can be eligible for the ITC the year they move into their property, provided they purchase a newly built home equipped with a solar panel system owned outright. If the system is leased or electricity is purchased through a PPA (Power Purchase Agreement), then it is the company that leases the system or signed the PPA that can claim the ITC. Contact BrightSuite to learn how much the ITC can offset your solar cost combined with Virginia solar incentives.