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The Federal Solar Tax Credit Explained in 2020

July 31, 2020
By John Cole

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If you’ve ever considered switching to solar, doing it in 2020 can save you thousands. The Federal Solar Tax credit is a federal program that offers incentives to consumers in the form of a tax credit. A tax credit is essentially a dollar for dollar reduction in taxes you owe. But the government is already in the process of phasing out this program. If you wait too long, you might just miss your chance.

This is the first year of the government’s downgrade of the ITC. From 2015-2019, it was 30%. In 2020, the ITC is at 26%. 2021, it will step down again to 22% and be eliminated in 2022. Since there are very few limitations to this program, it has been very successful and helped make solar viable.

As with most government programs, there are many questions concerning who is eligible, what is covered, and what exclusions are there. Overall, this is a very simple and generous program – while it lasts. We are here to explain the ins and outs of the ITC and make the most of your money. But first, it’s helpful to define the ITC.

What is the Federal Solar Tax Credit?

The Federal Solar Investment Tax Credit is a federal incentive program meant to spur on the solar industry by incentivizing solar installations for consumers, both residential and commercial. In most cases, you claim the credit in the year in which the solar array was placed into service. In 2020, the credit is at 26% of the cost of the project. In 2021, this will be reduced to 22%. The current law states that in 2022, tax credits for residential installations will cease completely while commercial installations will decrease, and remain indefinitely, at 10%. For commercial projects, there is some leniency based upon when a project is started or completed to claim the credit. All of this means that if you’ve ever considered solar, this is the year to do it.

A Brief History of the ITC

The ITC was first offered as part of the Energy Policy Act of 2005. Since that time, the solar industry has grown by a whopping 10,000%! Originally passed as a brief two-year tax credit, the program was incredibly successful. It has since been expanded and renewed multiple times, most recently in 2015. That December, congress approved the 5-year extension – and subsequent phase out – of the program. The ITC will retire for residential in 2022.

What is a Tax Credit?

To understand the ins and outs of the ITC– and how much money you can truly save – you need to understand what a tax credit it. A tax credit is not the same as a tax refund or a tax deduction. Rather, a tax credit “is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe.” It’s like the IRS just gives you a check for the amount of the tax credit. It’s important to note that because it is not the same as a tax refund, you have to owe taxes to claim the credit. For the majority of people, this is not a problem. But there are a handful of circumstances where an individual does not owe taxes, and thus would not be able to participate in the program.

How Much is the Federal Solar Tax Credit

In 2020, the ITC is 26%. For simple math, let’s say you pay $10,000 for a solar installation. You would then receive a credit of $2,600 once you turn in your taxes. Now let’s look at a real example. The average cost of a 9kW solar array might be as high as $27,000. With a 26% tax credit, you will receive $7,020 back from the government!

This does mean that you have to front the cost of the installation, of course, but you’ll get a hefty check at the end.

What’s the Difference Between 26% and 22%?

If you are considering solar, now is the time to act. Waiting until 2021 will cost you quite a bit. In the above example, a 9kW installation costs $27,000. If you choose to wait a year, your credit will drop from $7,020 to $5,940. That’s a difference of $1,080! And if you wait two years, the credit will expire completely, costing you thousands of dollars for the same exact installation.

What Does the ITC Cover?

Generally speaking, the ITC covers almost all expenses associated with a NEW solar install. This includes but is not limited to:

  • Solar PV panels
  • Contractor labor costs
  • Permit fees
  • Inspection fees
  • Freight shipping costs
  • Lift or scaffold rentals
  •  Mounting hardware such as strut, Z clips, screws, bolts
  • Energy storage devices that are charged exclusively by the associated solar panels
  • New add-ons to an existing installation
  • Even sales tax on eligible expenses

What Does the ITC NOT Cover?

As with every government program, there are a few exceptions and limitations. The ITC was meant to spur on the solar industry. Therefore, it’s important to note that this credit does not apply to used panels or equipment. Here are some of the things not covered under the ITC:

  1. Purchase of used solar panels and equipment
  2. Materials for the installation of used equipment
  3. Contractor labor costs for installing used equipment
  4. Leased solar installations (the owner of the leased equipment would be able to claim the ITC through commercial use)
  5. Purchased equipment, but not installed

When Can I Claim the ITC?

You are able to claim the federal solar tax credit for the year in which you performed a new solar installation. The installation is the key point. You can’t purchase panels and in December with plans to install them the following summer. The system must be placed in service that year.

Differences Between Old and New Constructions

There is a slight difference between installing solar on a new home rather than an old. For and existing home, you can claim the credit once the system is installed. For new construction, you can claim the tax credit the year in which you move. Most of the time, this will be the same year. But there are some exceptions in which a system is installed late in the year and you move in the following January or February. Before you claim it, however, confirm that the builder did not claim the tax credit on that installation.

Differences Between Residential and Commercial

There are two main differences between residential and commercial – the long-term amount of the credit and the window of time to claim the credit.

·  Long-term ITC – In 2022, the residential portion of the ITC will expire. Unless, of course, there’s another extension. With today’s political climate, it’s anybody’s guess. But for commercial projects, the ITC will remain active at 10% for 2022 and beyond. Since commercial installations are often larger, this will still be a credit of several thousands of dollars.

·  Timing – As we mentioned earlier, residential projects are able to claim the credit upon installation. But many commercial projects are multi-year endeavors. A commercial installation is able to claim the credit for that year if it has started solar installation or incurred 5% of the systems total cost (often in the form of an initial deposit with a contractor). The only caveat is that any project claimed for 2019-2021 must be completed by December 31st, 2023. This means that if a commercial project claims 30% for a 2019 project, the project must be installed by the end of 2023, or there will be a tax penalty 20% of the cost of the solar installation.

How Do I Claim the Federal Solar Tax Credit?

If you work with a tax professional, they would be your first stop. But if you do your own taxes, you need to complete the following:

  • Fill out IRS Form 5695
  • Attach that form to your IRS 1040
  • Maintain accurate records of all solar-related expenses

Other Ways to Save Money on Your Installation

Taking advantage of the ITC is not the only way to save money on a solar installation. Here are a few tips to save even more.

1. Shop around – with something complicated like solar, it’s easy to go with the first company with all the answers. But it’s possibly save $5,000- $10,000 by receiving multiple quotes.

2. Look for smaller companies – Big national installers don’t always offer the best rates. A bigger company means bigger overhead. There’s some comfort to believing that you hired the best. But that is incredibly hard to tell. Consider reaching out to a network of installers like energysage.com. Through one site, you can get multiple quotes from different vendors.

3. Consider local – As with many industries, keeping large purchase in-house are better for the community overall. If a local company can compete for the install, they would likely be able to offer you better and more convenient service if your system has an issue.

4. Compare your equipment – Top of the line solar equipment can be expensive and might not actually save you money in the long run. Factor in the efficiency rating of the panel with the cost to see if an upgrade will actually be worth it. But don’t pinch your pennies so tight that you purchase a system that won’t last.

Green Energy Geeks

And Now For the Solar “What Ifs?” & FAQs

As with most government programs, it’s difficult to determine if the program fits your specific situation. Why we cannot predict every possible situation, here are a few frequently asked questions.

What if I’m not a homeowner?

No worries. You do not have to own the home on which the system is installed. But you do have to own the system. You cannot claim the ITC on solar equipment you do not own.

What if it’s installed on my vacation home?

You can claim the ITC on a second home. However, if second home is a rental unit, you cannot claim the residential ITC. But you may be eligible for the business ITC under Internal Revenue Code section 48. To further complicate matters, if you live in the home part-time and rent it out when you aren’t there, then you can claim the residential ITC credit equal to the percentage of the year you live in the home.

What if the panels aren’t on my roof?

It doesn’t matter where the installation is. It only matters whether the installation was put into service. They just need to generate electricity for your property.

What if I’m not on the grid?

You can claim the ITC for off-grid properties.

What if I installed it myself?

You do not need to work with a contractor. You can claim any related expenses, but you cannot claim your own labor.

Is there an income limit for the ITC?

No, there is not.

What if the credit is larger than my tax due?

You can carry part or the whole of the credit over to the next year. For example, if you owe $4,000 in taxes, and your ITC credit is $5,000, then you can still claim the following $1,000 the next year.

What if I don’t owe taxes at all?

As mentioned earlier, the ITC is a tax credit. But even if you don’t owe taxes this year, it’s still possible to claim the credit. Per section 48 of the Internal Revenue Code, the ITC can be carried back 1 year and forward 20 years. This means that once you install your solar, you have 20 years to claim that year’s federal ITC. Just make sure you keep your records!

What if I installed batteries?

Energy storage devices are allowed under the ITC as long as the energy that charges them comes solely from the solar installation.

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