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Benefits of the 26% Solar Tax Credit Extension: What You Need to Know
During the last few decades, solar power evolved from an experimental concept to one of the fastest growing energy sources in the world. In 2020 alone, the US added over 90 gigawatts of new solar power systems, with an electricity production that could power over 17 million homes. The federal solar tax credit, created in 2006, has been a key incentive for photovoltaic technology. The tax credit would originally end in 2022, but a Congress bill from December 2020 extended the benefit for two years.
The federal solar tax credit is officially known as the Investment Tax Credit or ITC. Until 2019, homeowners and businesses who installed solar panels could deduct 30% of their project costs from federal taxes. However, the solar tax credit was being removed between 2020 and 2022, according to the following schedule:
- 26% tax credit in 2020
- 22% tax credit in 2021
- 10% tax credit in 2022, available only for solar power systems owned by businesses
Thanks to the Congress bill, the solar tax credit will now be phased out with the following schedule:
- 26% tax credit in 2021 and 2022
- 22% tax credit in 2023
- 10% tax credit in 2024, available only for businesses
This is great news for the solar industry: now that the 26% credit is available for two more years, homeowners and businesses have a stronger incentive to go solar. It is important to note that the 10% tax credit will remain available for businesses after 2024. However, building owners have an opportunity to claim 26% or 22% by acting fast.
How Much Can I Save with the Federal Solar Tax Credit?
Since the Investment Tax Credit is a percentage-based incentive, its value increases along with the cost of your solar project. According to the National Renewable Energy Laboratory (NREL), small solar systems have a cost of around $3,000 per kilowatt, while medium-sized commercial installations cost around $2,000 per kilowatt. In large-scale solar projects, like those used in the utility sector and industrial parks, the installed cost can drop below $1,000 per kilowatt.
- For a homeowner installing a 6-kW solar PV system, the estimated cost is $18,000 and the 26% federal tax credit is $4,680.
- For a commercial developer installing a 250-kW solar array, the estimated cost is $500,000 and the 26% tax credit is $130,000.
- If the solar tax credit is higher than your actual taxes, there is no problem. You can deduct part of the incentive on your next tax declaration, and keep the rest for the following year.
The solar tax credit extension is a major incentive for projects of all scales. For example, the 6-kW home installation in the example above would have only received $3,960 in 2021 and $0 in 2022. In the commercial project assumed, the tax credit would have been $110,000 in 2021 and only $50,000 in 2022. Now that the 26% tax credit stays available for two more years, homes and businesses that go solar will be saving millions of dollars in total.
For larger solar projects owned by businesses, which take longer to install, the tax credit is calculated for the date when construction starts. For example, if a developer decides to go solar late in 2022, and the installation is completed until 2023, the tax credit is 26% and not 22%. However, all businesses that claim a 26% or 22% solar tax credit must complete their projects before 2025 to remain eligible. Otherwise, they can only claim a 10% credit.
Who Can Claim the Federal Tax Credit for Solar Power?
To get the solar tax credit, you must be the legal owner of the project in question. This means you get the benefit if you pay for a solar power system in cash, but also when using a loan to finance the project, since the bank is not the owner. However, there are two main cases in which you cannot claim the tax credit:
- Leasing a solar panel system.
- Signing a solar Power Purchase Agreement (PPA).
In a solar lease, you pay a fixed monthly fee to use a photovoltaic system, but the owner is the provider. The same applies for a solar PPA, where you pay for the electricity generated by the system, but without purchasing it directly. In both cases, the system provider gets the solar tax credit, but they are responsible for upfront costs, operation and maintenance.
Using a low-interest loan to finance a solar power project can be a smart business decision. There is no upfront cost, but you can claim a 26% tax deduction in less than a year. The funds that would have been paid as taxes become available to cover a large portion of the loan.According to the Solar Energy Industries Association (SEIA), the federal tax credit has helped the US solar industry reach an average growth of 52% per year. Since the incentive was created in 2006, the installed solar capacity has increased by over 10,000% in the US!
Note: This article is informative, and is not intended as tax advice. If you need to claim a tax credit, we recommend you contact a CPA.