The Solar Investment Tax Credit (ITC) is a green incentive designed to drive down the cost of installing panels on residential and commercial properties. Administered at the federal level, the ITC allows solar customers to claim a one-time tax credit – if they finance their solar photovoltaic (PV) systems with cash or loans.
How does the Federal Solar Tax Credit work?
When first introduced in 2006, the ITC offered participants a tax credit worth 30% of the total solar installation cost (parts and labor). So if you purchased a solar PV system that costs $10,000, you would qualify for a $3,000 credit that you could apply to your next IRS bill. In effect, your solar installation ends up costing only $7,000 (or 30% off the original price). However, the Solar Investment Tax Credit has undergone significant changes in the past year, with even bigger ones on the horizon. And if you are thinking about going solar, it is important you understand the impact of these developments.
What is different about the Solar Tax Credit in 2020?
Incentives exist to help jumpstart new industries and encourage widespread adoption. And the Federal Solar Tax Credits have accomplished precisely that for the PV sector.
According to the Solar Energy Industries Association, the ITC has helped the industry grow 10,000% since 2006 – with an estimated 50% annual growth in just the past decade alone. As solar continues to go mainstream, the industry has less need for supportive incentives like the Federal Solar Tax Credit. Thanks to economies of scale and R&D, the technology is increasingly within the financial reach of homeowners across the country. These price drops have helped make going solar more affordable than it already is. This has allowed those with modest budgets to save on their utility bills and reduce their environmental impact.
This explains why at the end of 2019, the ITC dropped from 30% to 26% for both residential and commercial solar applications. And to even qualify for this lower threshold:
- Installation of your solar PV system must begin before December 31, 2020, if you are a commercial system owner.
- Your PV installation must be placed into service before December 31, 2020, if you are a residential solar customer.
After that fixed December 31 deadline, the Federal Solar Tax Credits will undergo subsequent downgrades:
- At the end of 2020, the tax credit falls to 22% for all solar customers.
- By 2022, the ITC drops to 10% for commercial and utility-scale solar applications. For residential customers, the Federal Solar Tax Credits disappear entirely.
Customers who use solar leases are not eligible for this program.
Why delaying your solar investment is a mistake
With solar technology’s growing affordability, you may be tempted to put off your investment so that you can take advantage of lower prices in the future. Tomorrow’s solar PV panels will indeed be slightly cheaper than today’s. However, those savings vanish once you factor in generous programs like the Solar Investment Tax Credit. Through the end of 2020, it is still possible to knock 26% off of the total installation price if you move quickly enough. But if you wait too long, you risk paying full price for a system that the government is willing to subsidize today.