The 2021 Guide to Solar Tax Credits

Update: The ITC has been extended by two years!

Key Points

WHAT IS THE ITC?

The ITC is a federal income tax incentive that allows you to deduct a percentage of the total cost of installing a solar energy system from federal taxes with no cap. The credit includes equipment, wiring, labor, and even battery energy storage systems. It is a critical component in many customers’ financial calculations.

WHEN DOES IT EXPIRE?

The tax credit phases out over several years, with a smaller credit each year. Here’s the schedule for the step-down:


• 2021 – 26%
• 2022 – 26%
• 2023 – 22%
• 2024 & after – 10% for commercial, 0% for residential

HOW DO BUSINESSES USE THE CREDIT?

You can use your tax savings to grow your business, improve price competitiveness, and increase profits. However you choose to reinvest your tax credit, the savings and other advantages compound over time – giving your company an edge over your competition.

What is the Solar Investment Tax Credit?

The ITC is a federal income tax incentive designed to support the growth of solar energy. Since it was enacted in 2006, the ITC has helped the U.S. solar industry grow an average of 52% per year.

The ITC has been so successful that it’s been expanded and extended several times. When the Energy Policy Act of 2005 passed and enacted the ITC starting in 2006, the credit was limited to just a $2,000 credit which was set to expire in 2008. In 2008, the credit was extended another eight years and the cap was removed, allowing for credits of unlimited size. In 2015, the ITC was extended again, with the full credit available through 2019, a step down through 2021, and a permanent 10% credit for commercial projects after that. In December 2020, the ITC was extended yet again, with the then-current 26% credit extended through 2021 and 2022, after which the step down will resume.

The Step Down: Expiring Tax Credits

As of December 27th, 2020 the ITC has been extended by two years via the Consolidated Appropriations Act, 2021.

The ITC began stepping down in 2020, when it dropped to 26%. Now that it has been extended, the credit will remain at 26% through 2021 and 2022. After that, it will begin stepping down again. In 2023 it will drop to 22%. In 2024 it will drop to a permanent 10% for businesses and phase out completely for homeowners.

Note: This document is updated periodically to reflect changes to the ITC. Last updated on 1 January 2021.

Previously, the credit was scheduled to step down to 22% in 2021, and 10% for commercial customers or 0% for residential customers in 2022.

Download our 2021 guide to solar tax incentives 

Solar ITC FAQs

DO I QUALIFY?
Any homeowner or business with tax exposure is eligible to claim the credit. If you pay federal income tax, you’re eligible. Government entities, schools, and non-profit organizations are not eligible. If your organization is tax protected, it can’t claim a tax credit.
WHAT IF I DON'T QUALIFY?
A solar project structured as a power purchasing agreement (PPA) can claim a credit if the project owner pays taxes. Many educational and municipal solar projects are structured this way.

The ITC is a critical piece of the puzzle for the investors backing your PPA solar project. They will want to capture as much tax credit as possible to make their investment in your solar project payback. If a PPA is on the table for your institution, you should encourage your investors to move forward this year.

WHAT IF I DON'T HAVE A TAX APPETITE?
If your business is eligible for the credit, but you don’t have the tax appetite to benefit from the full credit in the first year, you can take advantage of carrybacks and carryforwards. The tax credit can be carried back one year and carried forward 20 years. If your business still hasn’t claimed the full credit after 20 years, you are eligible for a refund equal to half the remaining credit. The rest is lost.
WHAT ABOUT DEPRICIATION?
Under the federal tax code, renewable energy systems including solar can take advantage of one of two accelerated depreciation options. Either they can claim 100% bonus depreciation, or they can use the 5-year Modified Accelerated Cost-Recovery System (MACRS) depreciation schedule. The total depreciation amount will depend on your businesses’ tax rate.
ARE BATTERY ENERGY STORAGE SYSTEMS ELIGIBLE FOR THE ITC?
Yes and no. While there’s no credit for battery energy storage systems by themselves, if an energy storage system is paired with a solar installation the IRS considers it to be part of the solar installation and therefore eligible for the credit. This is a big deal for large electric users with expensive demand charges, because energy storage systems are often a key part of solar energy systems designed to reduce demand charges.
HOW DO I MAKE SURE I GET THE CREDIT THIS YEAR?
In 2018 the IRS issued guidance on what exactly is meant by starting construction for the purposes of claiming the tax credit. The Solar Energy Industries Association (SEIA) summarized these methods as follows:

(1) starting physical work of a significant nature (Physical Work Test), or (2) meeting the so-called Five Percent Safe Harbor test (i.e., paying or incurring five percent or more of the total cost of the facility in the year that construction begins).

In either case, once a project begins continuous progress has to be made towards completion. We can help with this. One of our specialties is walking our customers through every step of the solar process – including all permits, inspections, and applications needed to ensure you get your tax credit.

WHAT OTHER TAX CREDITS AND INCENTIVES ARE AVAILABLE?
Your state may offer its own tax credit. For example, Iowa offers a solar tax credit equal to half of the federal credit. Through 2019, the credit is 15%, after that it steps down in lockstep with the ITC. The credit is limited to $5,000 for individuals and $20,000 for businesses. The Iowa credit is capped at an aggregate $5 million with a $1 million set aside for residential installs, and is given out on a first-come, first-served basis.

If you’re considering solar in Iowa or a state with a capped credit, it’s a good idea to move quickly so you can take advantage of the state credit before the available funds are exhausted for the year.

Some utilities may offer rebates or other incentives, as well. Contact us to find out what incentives are available in your area and how they stack with the federal ITC.

Can you benefit from solar tax credits?

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How Our Customers Use Their Solar Tax Credit

The ways our customers use their credits are as varied as our customers’ businesses. Steffensmeier Welding & Manufacturing reinvested in an expanded benefits package for employees, AutoCAD training, and adding a second shift with new hires. Schaus-Vorhies Manufacturing views its credit and utility savings as an alternative to the higher-risk proposition of adding a new product line or service. Agri-Industrial Plastics Company is building a sustainability-focused strategy to become the employer of choice in the region and cement its position as a top supplier for the global brands it counts among its customers.

Above: Agri-Industrial Plastics Company (AIP) is using solar as part of their sustainability growth strategy to attract hires and clients.

However you choose to reinvest your tax credit, the savings and other advantages compound over time – giving your company an edge over your competition. The competition has heard of solar energy and might even be considering it. This year is your opportunity. If you adopt solar now while your competition sits on the sidelines watching the credit step down, you’ll have that much more time to put your utility savings and tax credit to work in your business.

Adopting solar before your competitors doesn’t just give you more time to use the tax credit and utility savings. You can also tell a story your competition can’t.

First. Largest. Cutting edge. These are the kinds of words used to describe our customers’ projects. Our customers have used their solar projects to attract new hires, bring leading politicians to their events, and earn press and award recognition. If you want to be the forward thinking-thinking business in your industry, solar energy is the right investment.

Never a Better Time for Solar

Between historic low prices on solar installations and the last year of the full tax credit, there has never been a better time to invest in solar. At Ideal Energy, we are experts at maximizing the return on your solar investment. Get in touch to see how the solar tax credit can help your bottom line.

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