The 2020 Guide to Solar Tax Credits

This is the last year businesses and homeowners can claim a 26% solar Investment Tax Credit (ITC). The ITC is in a final phase-out and will level off at 10% in two years.

The price of solar has been dropping for years, but the price declines are leveling off. With a high tax credit and low installation costs, 2020 may be the most affordable year for solar so far. Thinking about solar? Don’t leave money on the table. 2020 is the year to invest if you want to take advantage of significant tax credits before they disappear.

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:

• 2020 – 26%
• 2021 – 22%
• 2022 & 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 54% 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 just $2,000 credit 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.

The Step Down: Expiring Tax Credits

Now that we’re in 2020, the ITC step down has dropped to 26%, in 2021 will further reduce to 22% and in 2022, 10% will be available for businesses permanently. Homeowners won’t be able to claim any tax credit for projects begun in 2022 or later.

Download our 2020 guide to solar tax incentives

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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.

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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.

From Left to Right:Steffensmeier Welding and Manufacturing is reinvesting energy savings into employee benefits and expansion, Schaus-Vorhies Manufacturing (SVM) saves about $100,000 annually in energy costs with their half-megawatt array, sited on a former brownfield.

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.

Ready to reap the benefit of solar tax credits?

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