Clean energy is nothing new, but the growth of solar energy in the U.S. continues to change the landscape of how it is used. The Solar Investment Tax Credit (ITC) is a federal policy enacted in 2006 creating a 26% tax credit for solar systems on residential and commercial properties.
Significance of the Solar ITC
Congress recognized the need to add the ITC to the Energy Policy Act of 2005. Although initially set to expire in 2007, it was extended multiple times, with the latest extension through 2021. To date, owners of new commercial solar energy systems will be able to deduct 10% of the cost from taxes. This does not apply to residential solar energy systems. The Solar ITC has helped to reduce energy costs for businesses while providing a cleaner and safer economy.
How does this tax credit work?
Residential owners can claim 26% federal tax credit claimed against their residential tax liability under Section 25D, applying the credit to personal income taxes. Section 48 allows commercial entities to claim the credit if they install, develop, or finance projects with a solar system component. The ITC is based on a “commence construction” standard, where taxpayers must meet to establish that construction of a solar facility began for the purpose of claiming the ITC. There are different criteria for residential and commercial projects.
After 2021, the residential credit drops to zero. Homeowners with newly built homes that have solar systems they outright own will be eligible for the ITC the year they move into the home. If the solar system is leased or electricity is utilized through a power purchase agreement with the utility company, they cannot claim the credit.
As one of the most important federal policy tools supporting the growth of solar energy, the solar ITC has helped the U.S. solar industry grow over 10,000% since implemented, with an annual average growth of 50% over the last decade. Providing these tax incentives that aid in stability and investment growth in this area is not only important but sorely needed. Knowing these tools are in place to assist others in utilizing solar energy makes a difference. For the near future, this incentive is gold.