December 30, 2021

All About the Federal Tax Credit (ITC)

2023 Updates to the ITC Thanks to the Inflation Reduction Act

On December 27, 2021, the federal Investment Tax Credit (ITC) for solar energy received an update through the Inflation Reduction Act. The ITC is a tax credit that allows businesses and individuals to claim a credit on their federal income tax return for the cost of installing solar energy systems.

Previously, the ITC provided a credit equal to 26% of the cost of a solar energy system. However, the Inflation Reduction Act redefined the ITC to provide a credit equal to 30% of the cost of a solar energy system for system for the next decade.

President Biden signed the Inflation Reduction Act into law on Tuesday, August 16, 2022. One of the many things this act accomplishes is the expansion of the Federal Tax Credit for Solar Photovoltaics, also known as the Investment Tax Credit (ITC). This credit can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system.

Biggest changes:

The ITC increased in amount and its timeline has been extended. Those who install a PV system between 2022 and 2032 will receive a 30% tax credit. That will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. If you’ve already installed a system in 2022, your tax credit has increased from 22% to 30% if you haven’t already claimed it.

The solar+storage equipment expenses included in the ITC have expanded. Now, energy storage devices that have a capacity rating of 3 kilowatt hours or greater are included. This includes stand-alone storage, but here’s why you should pair it with solar.

The ITC will cut the cost of installing rooftop solar for a home by 30%, or more than $7,500 for an average system. By helping Americans get solar on their roofs, these tax credits will help millions more families unlock an additional average savings of $9,000 on their electricity bills over the life of the system.


Fundamentals of Investment Tax Credit (ITC)

Due to the approval of the 2016 federal spending bill, solar panels an affordable form of renewable energy. The bill passed by Congress, more formally referred to as the investment tax credit (ITC), allows homeowners to deduct 30% of the cost of implementing solar energy systems from their federal taxes. ITC applies to commercial and residential solar energy systems, which has made the utilization of solar energy more affordable for American citizens. Since then, the subsidy has been debated wildly. As of 2021, the federal tax credit is at 22%, and scheduled to decrease. There are rumors of the ITC being extended to help continue the adoption of commercial solar.

How ITC is Changing the Solar Industry

The Energy Policy Act installed in 2005 initiated the federal ITC and was to last until the end of 2007. However, multiple extensions were granted to prolong the duration of the ITC until the year 2016. As the demand of solar energy rose, experts began to analyze owner’s policy of setting up their solar array. The extension of the policy has allowed for improvements of economical and environmental utilization of solar energy for consumers and suppliers. In late December 2015, Congress passed the federal bill to extend to homeowners until 2021. The specifications of the bill follows:

Currently Policies
2016 – 2019: The tax credit started at 30% of the cost of owner’s new solar panel system.
2020: Tax reduction of 26% of the cost of owner’s new solar panel system.
2021: Tax reduction of 22% of the cost of owner’s new solar panel system.
2022 onwards: Tax reduction of 10% of the cost of owner’s new solar panel system. There is no federal credit for residential solar energy systems.

Prior to the ITC, owners of new solar panel systems could not claim tax credit unless their system was in full operation. Legislation is now allowing owners to claim tax credit after the installation and construction of system is finished – as long as system is fully operational by December 31, 2023.

Qualifying for Solar Panel Credit
Any owner of a solar energy system may qualify for solar tax credit. If an owners does not have enough tax liability to claim the entire credit in one year, the owner has the ability to use those remaining credits in future years. By “rolling over” the remaining credits, the owner will be able to receive full benefits from claiming tax credits. Before inquiring about solar credit, check to see if your solar panels have been issued through a lease or PPA of installer. If the owner is on a lease or PPA then owner would not be eligible for tax credit due to not being the proprietor of the system.

Claiming Solar Credit
As an owner of a solar system, tax credit can be claimed when filing a yearly federal tax return.

If using an accountant to file your taxes, make sure to let your accountant know that you are implementing solar energy on your property.

If filing your own taxes:
Check if you are eligible for ITC by making sure you are the proprietor and your federal tax liability are in order.
Complete IRS Form 5965 to validate your qualification for renewable energy credits
Add your renewable energy credit information to your 1040 form that you normal file

Tips When Considering Solar Energy Systems
Homeowner who shop more, will save more. On average homeowners who receive multiple quotes on solar save 10%.
Investing in solar energy is a big financial decision and should be made with thorough consideration. Consumers should research as many solar energy options as possible in their considerable area. Both local and national installers may charge inflated prices and you want to be careful of over-pricing.

Use online searches to find the best installer in your area. Solar Marketplace from EnergySage allows for free quotes from local installers. Homeowners who receive 3 or more quotes can save between $5,000-$10,000 in their solar energy installation.

Large Solar Companies May Not Offer the Best Prices
Smaller solar companies may be the best deal when considering solar energy. A recent study from the U.S. government found that large solar installers may run up to $2,000-$5,000 more than smaller companies. The best advice is to compare multiple bids between large installers and your local solar installers.

Comparing Equipment and Financial Packages
A downside of large solar installers has been the lack of adequate equipment for your property. Large installer lack in equipment options, and what they offer may not be suitable for your geological location. This can considerably impact your systems electrical efficiency. When comparing bids of solar energy be sure to compare the expenses of the variety of equipment options.

Investment in the top of the line equipment only makes sense if the equipment is suitable for your location. Finding the best value for your solar energy system will take time, but well worth the research. Be sure to consider not only the financial variances, but your location as well. Each property will require different equipment based on technological and environmental variances. It is best to compare the financial packing and quality of equipment from multiple solar companies before investing in your system.