The Solar Investment Tax Credit: Time is Running Out
This is an update of the previous article further down the page:
The Solar Investment Tax Credit, or ITC, was created in 2006 to help grow a new industry – solar electric power. In the early days, prior to 2006, solar was expensive compared to more traditional sources of energy, especially fossil fuel. Solar was the realm of environmentalists, off-gridders, and perhaps a few unique situations where solar made sense despite the high cost. Thankfully, from growing public support for renewable energy, the federal government created the solar investment tax credit to help even the playing field and give solar the foothold it would need to become a thriving industry. It worked. Since its inception, the ITC has helped the solar industry grow 1600%. However, the ITC is also designed to ramp down and eventually be eliminated completely. Unfortunately that day will soon be upon us.
The ITC has been under threat before. It is unlikely to be extended again.
The ITC was actually supposed to have ended already. The original ITC program was meant to expire in 2007, or shortly after its creation. Thankfully congress extended the solar investment tax credit, but it again came under threat and saved by legislation in 2015. The current ITC begins to ramp down in 2020 and goes away completely by the end of 2021. Only utility-scale solar, such as investor-owned utilities or commercial solar systems, can still get renewable energy credits beyond 2021. They can also get the federal solar tax credit on non solar pv systems such as geothermal heat pumps, fuel cells, or other energy efficiency installations but rooftop solar systems and ground mount solar installations for homeowners, the investment tax credit ITC will no longer exist after 2021.
2021 feels like plenty of time?
It’s not. As I write this in August of 2018, people have a little over a year to go solar before the ITC ramps down from 30%, to 22%, to nothing. This is free money from the IRS to go solar. The ITC value on an average solar power system is around $7,500. I cannot stress enough that this is free money to go solar! If wait much longer you are simply going to miss out. Don’t expect the ITC to be renewed again, industry experts expect it to go away forever.
- 2019: 30% ITC available
- 2020: 26%
- 2021: 22%
- 2022 and beyond: no more residential ITC
Guide to the solar investment tax credit.
Frankly, a “guide to the solar investment tax credit” is not necessary. It’s simple; the solar investment tax credit is a federal tax credit that allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes. Don’t have the tax liability to use your entire credit? You can roll it over to subsequent years. The only catch is that when using a lease or PPA, you do not receive the rebate, the lease or PPA company does – but the savings are usually folded into a lower monthly payment.
The ITC is so simple to implement, that many people handle the paperwork themselves. We recommend you speak to a tax professional prior to solar power installations.
Where else is the government investing in solar energy projects? In what states are these applicable?
Solar incentives differ widely from state to state and locally, so do government investment in solar projects. Some areas have different feed-in tariff and Net Metering math, or none at all. If you are located in Southern California, give us a call and we’ll walk you through everything that’s available to you.
What is a breakdown of some of the solar panel purchasing and financing options?
Solar energy systems are installed mainly using cash, finance, lease and PPA. Cash is the best option as there are no financing costs, but most people are unable to use this option. Financing is the next best option as the homeowner keeps the system after it is paid off, and the system pays for itself faster as there is no lease or PPA middleman. Lease and PPA are excellent options, but generally only for those without high enough credit scores to qualify for financing. See this article on the difference between a PPA and a lease for more information.
What is the minimum expense of getting into the solar panel market?
There is no one-size-fits-all answer to this question. You need a solar panel system sized to exactly your individual needs. The minimum expense is perhaps 1 panel on your roof, but it will do little to reduce your electricity bill. The average system costs around $25,000, but is reduced to $17,500 after the ITC solar incentives. The total cost of the system is not what’s important, it has to be compared against how much money it will save you over the lifetime of the system.
What kind of investment do most homeowners who get solar panels make?
Again, this is specific to each individual household. Most solar panel systems pay for themselves around year 7 through Net Metering.
How long does installation usually take?
It takes about 2 or 3 days for average solar energy systems. We start early, around 7am. We install with the minimum disruption to the homeowner as possible, pick up our trash, and respect people’s privacy and property.
Briefly, how has solar panel technology evolved over the past few years?
It has evolved very little in not only the last few years, but the last 20 years. Panel performance is measured in ‘efficiency’, meaning, how much sunlight they convert into usable electricity. Efficiency has only improved by a few percentage points in the last few decades.
What regions/climates are optimal for solar panels?
Oddly, solar panels perform best in cold weather! But don’t worry, they do well in warm Southern California as well. It could be said that solar panels along the cooler coastal regions slightly outperform panels in the desert, but the coast gets less sunshine and things begin to even out.
Previous article below:
The most important solar policy of the 21st century, which has helped drive the solar industry boom and dramatic savings to consumers, is slated to expire next year. Unless Congress extends it, the residential component of the Solar Investment Tax Credit (ITC), which provides a 30% federal tax credit to home solar buyers, will be no more on January 1, 2017.
In his proposed 2016 budget in February, President Obama made a move to extend the solar ITC permanently. However, Congress is unlikely to approve this budget as is. Rhone Resch, president of the Solar Energy Industries Association (SEIA), is pushing hard for an extension. “Oil and gas has had incentives since 1916, coal since the 1930s, and nuclear since the 1950s,” he said at the PV (solar PhotoVoltaics) America 2015 conference earlier this month. "They aren't ramping down, so why should we?"
Although Congress has given the credit new life twice since its passage in 2006, it's impossible to say what will happen this time around. Given that many of the big state incentives have come to the end of their life (the California Solar Initiative is no longer taking new applications), the ITC may be the last big solar subsidy for most California homeowners.
If you have been considering a solar PV system, now is your chance to make a move or miss out on sizeable savings. To be eligible for the credit, under the current deadline, PV systems must be installed and running by December 31, 2016.
What Is the Solar Investment Tax Credit?
The Solar Investment Tax Credit is a dollar-for-dollar reduction in federal income tax for home solar buyers. It's not a rebate (which helps you pay for your system directly). And it's not a tax deduction (which reduces your total income and thereby decreases your tax bill by a small amount). It's dollars that you don't have to pay the IRS, or that the IRS will refund to you in April if you've overpaid.
Who Can Get It?
Any U.S. taxpayer who purchases a solar system outright is eligible for the ITC. No matter what financing method you use to buy your system; cash, loan, a line of credit, or even that mint-condition Tony Gwynn rookie card. In almost all cases, you can take the tax credit.
If you installed your system with a solar lease or Power Purchase Agreement, then you are not eligible, since the leasing company actually owns the system.
Remember, this is a tax credit, not a rebate, so you must have a tax liability to benefit. If somehow you don't pay income tax (I won't ask), then you won't be able to use the credit.
How Does It Work? How Much Will I Save?
The ITC for residential system owners is 30% of the net system cost. You are permitted to combine it with other financing plans.
Let's say you purchase a system in 2015 for $25,000. Take the net cost, which is the price you paid less any other credits*, and multiply that by 30%.
$25,000 x 0.30 = $7500
(*Some states, municipalities, and utilities have their own rebates or credits, and the IRS won't let you double dip, so you must subtract those credits from your total to come up with the net cost. People in Baker Electric Solar's service area are not currently eligible for any credits other than the ITC.)
Next, complete an IRS form 5695, file it with your 2015 tax return, and take $7500 off your tax bill. If you don't owe the IRS that much, carry the excess over to your 2016 return. (It's a one-time credit, but you may carry it forward up to five years.)
How to Begin Saving Sooner
Your solar tax credit is really like a prepayment to the IRS. So if you don't want to wait until tax time to see your savings, you can decrease your withholding or your quarterly estimated tax payment as soon as your array is running. That's more cash in your pocket today, and another reason not to wait to buy your new system.
(Note: Please always consult with your tax advisor about how tax incentives will work for you before you take action. The tax code is a complex animal.)
Why Is the ITC Important?
Since it was implemented in 2006, the ITC has helped spur the renewable energy industry boom, driving competition and innovation and reducing costs and carbon emissions -- a win-win for consumers and the environment.
According to SEIA, from 2010 to 2014, the average price of a residential PV installation dropped 45% and the average price of a PV panel 63%. “The solar industry employs nearly 175,000 Americans, pumps $15 billion a year into our economy and offsets more than 20 million metric tons of damaging carbon emissions into the air. This remarkable progress is due, in large part, to smart, effective public policies like the solar ITC,” said SEIA's Resch.
What's the Catch?
There is none. And other than the usual impenetrability of the IRS form (which providers like Baker Electric Solar will help you with), it's quite painless.
The bad news of this story is that for residential solar, it all goes away December 31, 2016, so make sure your system is online by then or you'll miss out.
Find out how much the ITC can help you save on your new system. Contact Baker Electric Solar.
Speak Out for Smart Solar Policy, and Savings
If, like me, you think letting this important policy come to an abrupt end is a dreadful idea, then please contact your representatives and tell them so. Extending the credit has clear benefits for consumers, the solar industry, the economy and the environment.
Contact your congressional representatives!