Your Guide to the 2020 Solar Tax Credit Extension
The solar industry received a big boost to close out 2020. On December 21st, both houses of the U.S. Congress passed a massive 5,593-page bit of legislation focused on providing pandemic relief for millions of Americans struggling during COVID-19. Also included in this $900 billion relief deal is language extending the Federal Investment Tax Credit (ITC) for qualifying solar power systems until 2023. After some delay, this bill was signed into law on December 27th.
What this means for solar customers is that they’ll have two extra years to claim the 26% solar ITC and save on a new system. The extra time will allow more home and business owners to benefit from clean energy and perform the recommended due diligence to go solar. The extension is also expected to alleviate disruptions to supply, labor, and construction that solar developers have experienced as a consequence of the global pandemic.
“We are heartened to see Congress step up to provide Americans with some relief after our country has been mired in a public health and economic disaster,” said Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association (SEIA). “This pandemic has taken an immeasurable toll on American families, and our deepest sympathies are with those who have lost loved ones and those who are suffering economically because of the ongoing crisis.”
“Over the next few years, we have an opportunity to build a stronger, more reliable, and more equitable American energy economy, and the action Congress is taking today is a helpful down payment.”
A Refresher on the Federal Solar Tax Credit
The Federal Investment Tax Credit—sometimes referred to as the Solar Tax Credit or solar ITC—is a dollar-for-dollar reduction in the income taxes that an individual or company would otherwise pay to the federal government come tax time. First enacted in 2006 after the passage of the Energy Policy Act of 2005, the ITC has been an incredibly effective piece of energy legislation, creating hundreds of thousands of jobs and injecting billions of dollars into the U.S. economy.
The purpose of this tax credit is to encourage home and business owners to invest in energy-saving technologies like solar PV. Not only do you benefit by reducing your tax burden, but your local community benefits as well through a cleaner energy mix. As more Americans switch to solar, it means a transition away from polluting energy sources like coal and natural gas that are damaging to our health and environment.
According to SEIA, the ITC has helped the solar industry see a 52% average annual growth since it was enacted. In the five years between 2014 and 2019, solar employment increased by 44%, five times faster than job growth in the overall U.S. economy.
When Will the Solar Tax Credit Expire?
The new legislation postpones the original step-down date for the 26% Solar Tax Credit from the end of 2020 to the end of 2022, giving home and business owners two more years to take advantage of the generous solar incentive. Starting in 2023, the tax credit will drop to 22% before being phased out entirely for residential projects in 2024. Commercial projects will drop to a 10% credit starting in 2024.
How Do I Claim the Solar Tax Credit?
DISCLAIMER: We are not tax professionals. Please contact a qualified tax expert for questions or guidance related to Federal Investment Tax Credit.
The Solar Tax Credit is a dollar-for-dollar reduction in the amount of income tax you owe. If you do not owe anything in taxes, you will not be eligible to claim the tax credit. The ITC is not a tax refund. If your tax liability is initially lower than the savings from the solar tax credit, the remaining credit rolls over to the following year for up to five years.
In order to be eligible for the full 26% Solar Tax Credit, you must also complete the installation of your solar power system by the end of 2022 and own the system (if you lease the system, the company you lease from would be able to claim the credit). The solar PV system must also be new or being put in use for the first time (i.e., you can only claim the credit on the “original installation” of the equipment).
You may also be able to claim the ITC for non-primary residences, again so long as you own the property and reside there for part of the year.
Filling out the necessary forms
Once you have determined that you are eligible for the ITC, the next thing to do is make sure you have the required tax forms. You will need to file IRS Form 5695, the “Residential Energy Credits” form, and will use it to complete another section on your standard 1040 form. This sounds complicated, but the form is relatively straightforward.
On Form 5695, you will enter the total cost of your solar system on the line labeled “qualified solar electric property costs.” Keep in mind this number is the total cost of your system, including parts and installation, minus any cash rebates you received. Let’s say your total cost was $9,000. The next step is to multiply your qualified costs by 26%. [$9,000 x 0.26 = $2,340]. Write the calculated total on the last line of your Form 5695.
Here is a list of some of the expenses you can claim:
- Contractor labor costs
- Solar PV equipment
- Balance-of-system equipment (e.g., racking, wiring, inverters, etc.)
- Energy storage devices that are charged exclusively by the associated solar PV panels
- Misc. fees (engineering, installer, consulting, electrician, permitting)
- Shipping costs for freight
The final step to claiming the solar tax credit is to determine if you have enough tax liability for the total deduction. This depends on your income and other factors affecting your total federal tax liability. Don’t worry! If your ITC deduction exceeds your tax liability, you can carry it over to next year’s taxes and deduct the remainder then. The final page of Form 5695 will take you through the calculation and will tell you to transfer the proper figure to your 1040 form.
At this point, you can file your taxes as you normally would, with the assurance that you have saved a bundle!
Go Solar with Generous Incentives
With this extension, the solar Investment Tax Credit will continue to be a key driving force behind solar energy adoption throughout the U.S. and will make it easy for homeowners and commercial/industrial customers to take back control of their energy.
While customers now have an additional two years to install solar and become eligible for the credit, we encourage you to begin your journey sooner rather than later as it is highly unlikely the tax credit will be renewed a final time, or even at its present 26% level.
If you’re considering going solar in 2021, start early with a free consultation from our solar and energy storage experts at IPS. We will design a system that meets your needs and help you navigate any available solar incentives, including the Solar Tax Credit and other local rebates or programs.