August 31, 2021

How to Calculate the New Federal Solar Tax Credit in 2021

How You Can Calculate the New Federal Solar Tax Credit for 2021

***Please note that this is for informational purposes only. We can not offer tax advice and all information concerning tax credits should be confirmed with your tax adviser.****

When looking into buying a solar energy system, timing is very important. Since the signing of the December 2020 COVID-19 Relief package and U.S. federal government omnibus spending bill – as well as the IRS’ June 2021 extension for renewable energy tax credits — there have been some extra key extensions for the solar Investment Tax Credit (ITC) that you must be aware of:

Deadline for solar energy tax credits extended: On June 29, 2021, the IRS announced that those developers who began construction on renewable energy projects between 2016 and 2019 have been granted six years to finish work on the plants and be eligible for the 30% ITC. Those who started construction back in 2020 will have five years to finish those renewable energy projects and can qualify for the 26% ITC. This extension was created after the market disruptions following the coronavirus pandemic.

2-year extension for residential and commercial solar energy (Page 2440): The commercial (Sec. 48) solar investment tax credit has been extended at 26% through to 2022. This is instead of the phasedown to 22% that would have happened on Jan. 1, 2021, which will now take place from Jan. 1, 2023. Any commercial projects that are put in service after Dec. 31, 2023 will automatically be eligible for a 10% ITC, unless they began building before this date and are eligible for IRS safe harbor treatment.

Creation of new offshore wind ITC (Page 2455): Offshore wind projects will now have a 30% ITC through Sec. 48 for projects whose construction started after 2016 through the end of 2025. This change is retroactive, which means that those renewable projects that have already started after 2016 will be able to qualify for the 30% ITC.

Keep in mind that not everyone deciding to switch to solar can be eligible to receive the solar tax credit. Those who qualify can calculate it in different ways.

U.S. Solar Federal Investment Tax Credit (ITC) Cheat Sheet:

Before the ITC, those who owned new solar panels or combined those with storage systems were not allowed to claim Federal tax credits unless their system was fully operational. Due to the new 2020 extension of ITC tax credit, these are the new deadlines:

– 26% Tax Credit: Commence construction (determined by Physical Work Test or 5% safe Harbor Test) by 12/31/2022, complete project by 12/31/2023.
– 22% Tax Credit: Commence construction (determined by Physical Work Test or 5% Safe Harbor Test) by 12/31/2023, complete project by 12/31/2025
– 10% Tax Credit: Anything built after 01/01/2026

*Safe Harbor qualifications and dates may change due to COVID-19.

Not only are there better incentives for commercial and residential solar, but also there are moves to extend the financial benefits from investing in batteries and other electric storage systems thanks to the ITC.

A bilateral bill titled the Energy Storage Tax Incentive and Deployment Act was launched on April 4th, 2019 as the latest update to a bill first introduced in 2016 by Sen. Martin Heinrich (D-NM). This extension is basically offering the same incentives but at the same time decreasing percentages for solar.

Anything else that you need to know for 2021?

To be eligible for the full solar investment tax credit, you must be able to pass one of two tests to ascertain when the construction started:

– “Physical Work Test,” which means proof that the construction was underway as explained by the Internal Revenue Service
– “Five Percent Test,” that shows that you had sustained at least 5% of the total project costs before the deadline. These are permits, site assessments, plans, environmental impact studies — all of these expenditures are eligible under this test.

As a result, many businesses are now pushing forward on some projects, especially those who are funded by Power Purchase Agreements (PPAs). This is due to the fact that the step-down percentage can negatively affect financing by as much as 10 percent for projects that are pushed back till 2023 or beyond.

It goes without saying that the ITC can be a helpful financial incentive for many commercial businesses implementing solar energy (and soon storage). Unfortunately though, not everyone is eligible for it. That’s why we have compiled the following useful FAQ guide to the solar federal ITC.

What is the Federal Solar Tax Credit?

First things first, it’s useful to stress out that a tax credit does not mean a tax deduction. A tax deduction usually deduct some of your gross income to establish what your taxable base income is. A tax credit is actually much better as it can be used to pay off federal taxes you may be owing. Some could compare it to an IRS gift card.

How do I know if I qualify for Solar Tax Credit?

Simply put, any US taxpayer, business or consumer who began construction of a solar system or a solar + storage system before January 1, 2023 qualifies to receive the full 26% solar ITC.
You must note that you won’t qualify if you installed your solar system with a solar lease or a solar PPA. This is because the leasing company actually owns your solar system, and they will be the ones receiving the ITC. However, the majority of the leasing companies take into consideration the value of the 26% ITC when working out your lease costs so in a way you will still be taking advantage of it by having lower payments.

How Can you Calculate the 26% Solar ITC?

Calculating the 26% ITC differs for homeowners and commercial businesses. Homeowners calculate the 26% on the net installed cost which means after you’ve deducted the value of any qualifying rebates, whether state or utility ones. This means that if for example the total cost for your solar panels installation was $20,000 and you are getting a rebate of $5,000, your total upfront expense is reduced to $15,000.

So to calculate the 26% ITC, this is what you have to follow:

26% x $15,000 = $3,900 solar tax credit that you can utilise when paying taxes to the IRS.

For those businesses who are deciding to commit to commercial solar projects, the rebate is actually calculated on the gross cost of the solar system installed; which means before deducting any rebates. So, using the same example:
26% x $15,000 = $3,900 credit that your company can use toward federal income taxes.

How Can you Calculate the 26% Solar ITC?

You may think that businesses can get a higher ITC. But actually the IRS considers that $5000 rebate as income, and so the business must pay tax on that $5000. On the other hand, for residential homeowners, the IRS sees the $5000 as a “reduction in value,” which could be considered like a sale discount, and so it is not taxable.

Is the 26% ITC Refundable?

So what happens if you are eligible for the ITC, but you don’t owe any taxes for that year? Will you receive a refund check for $5000 from the IRS, according to the example above? Sadly not, as the 26% ITC is not a refundable credit. Thankfully, according to Section 48 of the Internal Revenue Code, the ITC can be carried back 1 year and forward 20 years. Which means that if you had a tax liability last year but don’t have one this year, you are still entitled to claim the credit. However, if you haven’t had any tax liability for the past year and for this year, you are entitled to keep the credit on your records and can use it over the next 20 years.

Needless to stress out this again, we are not tax attorneys, so make sure you confirm with your tax representative for the most up-to-date ITC information.

Impact of the New ITC Extensions

Needless to say that this new ITC extension has become a very helpful subsidy by catalyzing both rooftop and utility scale solar energy across all the U.S. This newly-introduced, multi-year extension effective from the end of 2015 has led to a price decrease of solar, as well as decreasing installation rates and improving technological efficiencies. This solar tax credit is definitely an excellent example of a ground-breaking tax policy that encourages sustainability and the advancement of technology.

Since 2015, it is estimated that a total of 27 gigawatts of solar energy has already been installed in the US, and solar experts predict we will have nearly 100 GW total by the end of the year. From 2015 to 2017 we have seen a 25% increase in the number of solar industry jobs and obviously this number is meant to grow even further in the next decade. This solar rebate program is a clear example on how long-term federal tax incentives can help the economy grow, innovating technology further to reduce costs, and create a new range of jobs and skill sets. We offer commercial solar systems across all the USA: contact us TODAY to find out more about these ITC extensions and how we can help.

Everything You Need to Know About the Federal ITC for 2020

As mentioned previously, the solar industry is only bound to keep on growing, as many businesses are now looking to decrease energy costs and find more sustainable energy options. To keep you up to date, below you can read a guide on everything you need to know about the federal solar tax credit for 2020.

How ITC is Changing the Solar Industry

The ITC was actually initiated by The Energy Policy Act back in 2005, to last until 2007. Due to the hard work to combat climate change and increase voter popularity, several extensions were granted to increase the duration of the ITC to last until 2016. Since the demand for solar energy continued to increase, solar experts began to look into policies and their setup of solar array(s). This policy extension enabled improvements of how solar energy can help the economy and the environment for both customers and suppliers. Thankfully at the end of 2015, Congress approved another federal bill that extended benefits beyond 2022.

How to Qualify for Solar Energy Credit

Thankfully anyone who owns a solar energy system can qualify for solar tax credit. As previously mentioned, if someone does not have enough tax liability to claim the entire credit in one year, the owner can roll on those credits for future years. By “rolling over” these remaining credits, the owner will not lose them and can still receive full benefits. It’s important to check to see if your solar panels have been issued through a lease or PPA of installer before inquiring about solar credit. You won’t be eligible for a tax credit if the solar system is on a lease or PPA, as you won’t be the owner of the solar panels.

How to Claim Solar Tax Credit

You can claim tax credit as an owner of a commercial solar system when filing a yearly federal tax return.
Make sure you tell your accountant who is filing your taxes that you are implementing solar energy on your commercial property using IRS Form 3468 (Investment Tax Credit).

Tips When Looking Into Solar Energy Systems

Investing in solar energy is an important decision. Business owners must research as many options and providers as possible. For those organizations with less capital to invest, leasing or a Power Purchase Agreement (PPA) may be a better option.

Tips When Looking Into Solar Energy Systems

Investing in solar energy is an important decision. Business owners must research as many options and providers as possible. For those organizations with less capital to invest, leasing or a Power Purchase Agreement (PPA) may be a better option.

Get the most out of solar energy for your business with the Solar Federal Investment Tax Credit!
Are you ready to find out how to get your solar project off the ground or want to talk to one of our solar energy expert advisors about ITC eligibility?

Call (855) 801-0069 during business hours, and someone on our team will get back to you shortly!