Near the end of 2015, Congress approved the 2016 federal spending bill and extended the solar panel tax credit. This was helpful to solar companies, industry advocates and even homeowners because the bill had a 5-year solar tax credit extension. As a result, solar energy became more affordable for all Americans.
The federal solar tax credit, also called the investment tax credit (ITC), allows taxpayers to deduct 30 percent of the cost of solar energy system installation from their federal taxes. The investment tax credit applies to both commercial and residential systems, and its value has no upper limit.
The solar industry has benefited a lot from the federal solar tax credit, especially because the ITC was extended. The federal investment tax credit was originally established by the Energy Policy Act of 2005. At this point, it was set to expire at the end of 2007. The expiration date was then pushed back to the end of 2016 due to a series of extensions. This was quite a large extension, but experts believed the solar industry could reach its full maturity with the help of an additional five-year extension.
Congress passed a spending bill in late December 2015 that made tax credits available to homeowners through 2021. The circumstances throughout the years will change, but regardless, tax credit will be available in some form. From 2016 to 2019, the tax credit stays at 30 percent of the cost of the system. In 2017, a person can still get a major discounted price for their solar panel system. In 2020, people who own new residential and commercial solar will be able to deduct 26 percent of the cost of the system from their taxes. In 2021, the amount they will be able to deduct will decrease to 22 percent. From 2022 onwards, those who own new commercial energy systems will be able to deduct 10 percent of the cost of the system from their taxes. There will not be any federal credit for residential solar energy systems.
In previous years, owners of new solar energy systems were not allowed to claim the tax credit unless their system was operational. The legislation now allows them to claim the tax credit once the system starts to be constructed. The only requirement is that the system must be operational by December 31, 2023.
Anyone who owns a solar energy system is eligible for the solar tax credit. Even those who don’t have enough tax liability to claim the entire credit in one year have the ability to “roll over” the remaining credits into future years for the duration of the tax credit. It is important to remember that if you sign a PPA or a lease with a solar installer, you do not own the system and therefore you cannot receive the tax credit.
When you file your yearly federal tax return, you claim your solar tax credit. It’s important that if you have an accountant you let them know that you’ve started using a solar energy system in the past year. If you file your own taxes, make sure you follow the proper steps for claiming the investment tax credit.
The investment tax credit is a great incentive to go solar. Solar companies, homeowners and industry advocates all benefit enormously from the investment tax credit.