How to Calculate the New Federal Solar Tax Credit in 2021
Hypothetical Investment Tax Credit
For Informational Purposes Only
The estimated solar investment tax credit noted as above may be available to you. Please contact your tax professional and renewables contractor for more information.
PLEASE NOTE THIS HYPOTHETICAL ESTIMATE IS FOR INFORMATIONAL PURPOSES ONLY AND ACTUAL TAX CREDITS MAY VARY OR MAY BE UNAVAILABLE FOR A PARTICULAR PROJECT OR TAXPAYER. THIS INFORMATION AND THE ESTIMATE ILLUSTRATED HEREIN DOES NOT CONSTITUTE TAX ADVICE, AND ALL INFORMATION CONCERNING TAX CREDITS SHOULD BE CONFIRMED WITH YOUR TAX ADVISOR. PLEASE READ THE ARTICLE BELOW TO LEARN MORE ABOUT THE ITC AND HOW IT MAY APPLY TO YOU.
TAX INCENTIVES ARE SUBJECT TO CHANGE OR TERMINATION BY EXECUTIVE, LEGISLATIVE, OR REGULATORY ACTION AND DUKE ENERGY SUSTAINABLE SOLUTIONS MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OR AVAILABILITY OF ANY TAX CREDIT ILLUSTRATED IN THIS DOCUMENT
***Please note that this is for informational purposes only. We can not offer tax advice and all information concerning tax credits should be confirmed with your tax adviser.****
If you’re buying a solar energy system today, timing is everything. With the signing of the December 2020 COVID-19 Relief package and U.S. Federal government omnibus spending bill, there are some key extensions for the Investment Tax Credit (ITC) you should be aware of:
- 2-year extension for residential commercial solar (Page 2440): The commercial (Sec. 48) solar investment tax credit has been extended at 26% through 2022. Instead of the phasedown to 22% happening on January 1, 2021, the phasedown to 22% will now occur on January 1, 2023. Any project that is placed in service after December 31, 2025 will automatically qualify for a 10% ITC.
- 1-year extension for onshore wind (Page 2439): The Sec. 45 production tax credit (PTC)/investment tax credit (ITC), which was set to expire on December 31, 2020, has been extended through December 31, 2021. Projects that begin construction in 2021 will qualify for either the PTC at 60% of its full value, or an 18% ITC on the total project cost in the year the project is placed in service.
- Creation of new offshore wind ITC (Page 2455): Offshore wind will now have a 30% ITC through Sec. 48 for projects that in which construction starts after 2016 through the end of 2025. This change is retroactive, so projects that already started construction after 2016 will be able to access the 30% ITC.
But not everyone who goes solar is eligible to receive the solar tax credit, and for those who are, there are different ways to calculate it.
U.S. Solar Federal Investment Tax Credit (ITC) Cheat Sheet:
Prior to the ITC, owners of new solar panel or solar + storage systems could not claim Federal tax credits unless their system was fully operation. The 2020 extension of ITC tax credit deadlines are as follows:
- 26% Tax Credit: Commence construction (determined by Physical Work Test or 5% safe Harbor Test) by 12/31/2022, complete project by 12/31/2023.
- 22% Tax Credit: Commence construction (determined by Physical Work Test or 5% Safe Harbor Test) by 12/31/2023, complete project by 12/31/2025
- 10% Tax Credit: Anything built after 01/01/2026
*Safe Harbor qualifications and dates may shift due to COVID-19.
As well as incentivizing commercial and residential solar, there are moves to extend the financial investment benefits of the existing ITC to batteries and other electric storage systems.
A bi-partisan bill called the Energy Storage Tax Incentive and Deployment Act was introduced on April 4th, 2019 as the latest update to a bill first introduced in 2016 by Sen. Martin Heinrich (D-NM). The extension would offer the same incentives and ramp down percentages as shown here for solar.
What else do you need to know in 2021?
To gain the full solar investment tax credit, you must pass one of two tests to determine construction commencement:
- “Physical Work Test,” meaning proof that construction was underway as specified by the Internal Revenue Service
- “Five Percent Test,” that illustrates you had incurred at least 5% of the total project costs by the deadline. Permits, site assessments, plans, environmental impact studies — all of these costs qualify under the test.
Many businesses are pushing forward on projects, particularly those funded by Power Purchase Agreements (PPAs), as the step-down percentage can negatively impact financing by as much as 10 percent for projects delayed till 2023 or beyond.
The ITC can be a great financial incentive for many commercial solar (and soon storage) implementations. However, not everyone is eligible. Below, we’ve created a helpful FAQ / layman’s guide to the solar federal ITC.
What is the Federal Solar Tax Credit?
A tax credit is not a tax deduction. With a tax deduction, you deduct some amount off your gross income to determine your taxable base income. A tax credit is much better. It can be used to pay off your owed federal taxes. So, it’s sort of like receiving an IRS gift card.
Do I qualify for the Solar Tax Credit?
Any US taxpayer, business or consumer who commences construction of a solar or solar + storage system before January 1, 2023 is eligible to receive the full 26% solar ITC.
However, if you installed your solar system with a solar lease or a solar PPA, then you’re not eligible. Since the leasing company owns your solar system, they will receive the ITC. But most leasing companies take the value of the 26% ITC into consideration when calculating your lease rate, so you can still benefit indirectly by having lower system payments.
How Do you Calculate the 26% Solar ITC?
Calculating the 26% ITC differs for homeowners and commercial businesses. Homeowners calculate the 26% on the net installed cost; i.e., after you’ve deducted the value of any state or utility rebates. For example, say the total cost for your solar installation was $15,000 and you received a utility or state rebate of $3,000, your total upfront expense is now $12,000.
Consequently, to calculate the 26% ITC:
26% x $12,000 = $3,120 solar tax credit that you can use when you pay taxes to the IRS.
For businesses installing commercial solar projects, the rebate is calculated on the gross installed cost of the solar system; i.e., before deducting for any local or utility rebates. So, using the same example:
26% x $15,000 = $3,900 solar tax credit that your business can use toward federal income taxes.
You might think that businesses get a higher ITC formula. However, the IRS considers the $3000 utility rebate as earned income, and therefore the business has to pay tax on that $3000. For residential homeowners, the IRS considers the $3000 as a “reduction in value,” sort of like a sale discount, and therefore it is not taxable.
Is the Value of the 26% ITC Refundable?
What if you’re eligible to receive the ITC, but you don’t owe any taxes this year? Will the IRS send you a refund check for $3000, using the above example? Unfortunately, the 26% ITC is not a refundable credit. However, per Section 48 of the Internal Revenue Code, the ITC can be carried back 1 year and forward 20 years. This means that if you had a tax liability last year but don’t have one this year, you can still claim the credit. If you had no tax liability last year or this year, you can keep the credit on your books and use it any time you have a tax liability over the next 20 years.
Once again, we’re not tax attorneys, so please be sure to verify all of the above ITC information with your tax representative.
Impact of the New ITC Extensions
The ITC has resulted in an extremely effective subsidy in catalyzing both rooftop and utility scale solar energy adoption across the U.S. The multi-year extension from late 2015 has caused the cost of solar to drop, while installation rates and technological efficiencies have improved. The federal solar tax credit is a great example of an innovative tax policy that encourages investment in 21st-century energy systems and technology.
Industry experts estimate a total of 27 gigawatts of solar energy had already been installed in the US by 2015, and they predict we will have nearly 100 GW total by the end of 2020. From 2015 to 2017 there was a 25% increase in the number of solar industry jobs and that number is forecasted to increase throughout the next decade. The federal solar rebate program is proof that long-term federal tax incentives can drive economic growth, technological innovation to reduce costs, and create a new generation of jobs and skillsets. We offer commercial solar in 26 states, Washington D.C., and Puerto Rico, to find out more about the ITC close to you, contact us today.
Solar Tax Credit – Everything You Need to Know About the Federal ITC for 2020
The growth of the solar industry is only expected to continue, as businesses look to reduce energy costs and find cleaner energy solutions. To ensure you are up to date, we have explained everything you need to know about the federal solar tax credit for 2020 below.
How ITC is Changing the Solar Industry
The Energy Policy Act of 2005 initiated the federal ITC and was to last until the end of 2007. However, due to efforts to combat climate change and voter popularity, multiple extensions were granted to prolong the duration of the ITC until the year 2016. As the demand for solar energy continued to rise, experts began to analyze owners’ policies and their setup of solar array(s). The extension of the policy has allowed for improvements of economic and environmental utilization of solar energy for consumers and suppliers alike. In late December 2015, Congress passed another federal bill that extended benefits to beyond 2022.
Qualifying for Solar Energy Credit
Any owner of a solar energy system may qualify for solar tax credit. If an owner does not have enough tax liability to claim the entire credit in one year, the owner has the ability to use those remaining credits in future years. By “rolling over” the remaining credits, the owner will be able to receive full benefits from claiming tax credits. Before inquiring about solar credit, check to see if your solar panels have been issued through a lease or PPA of installer. If the owner is on a lease or PPA, then the owner would not be eligible for tax credit due to not being the proprietor of the system.
Claiming Solar Tax Credit
As an owner of a commercial solar system, tax credit can be claimed when filing a yearly federal tax return.
When filing your taxes, make sure to let your accountant know that you are implementing solar energy on your commercial property using IRS Form 3468 (Investment Tax Credit).
Tips When Considering Solar Energy Systems
Investing in solar energy is an important fiscal decision. Business owners should research as many solar energy options as possible. For some, leasing or a Power Purchase Agreement (PPA) may be a better option for organizations with less “cash” or capital to invest.
Get the most out of solar for your business with the Solar Federal Investment Tax Credit!
Ready to find out how to get your solar project started as soon as possible, or want to talk to one of our solar energy advisors about ITC eligibility?
Call 844.732.7652 during business hours, and someone on our team will get back to you shortly!