July 31, 2020

A Big Solar Incentive Is About to Shrink

Tax incentives that make it more advantageous for a company to go solar are about to be significantly reduced.  It’s a good time to familiarize yourself with the Solar Investment Tax Credit (ITC) because it’s going away, and so are significant potential savings.

When Did the Solar Tax Credit Start?

The ITC was enacted in 2006, and since then the U.S. solar industry has grown one hundredfold.  In fact, since its inception, American solar installations have grown at a phenomenal average of 52% per year.  It has been one of the most significant federal policies in contributing to the growth of this efficient clean energy option.  In 2015, the credit was extended, but now it has begun shrinking incrementally each year.   In 2019, the ITC was 30%, but was reduced to 26% this year.  Next year it will drop to 22%, then will remain at 10% ongoing for commercial installations and disappear for residential.

How Does the Solar Investment Tax Credit Work?

The solar investment tax credit is a way of getting a break on the cost of a new solar installation as a reduction of the following year’s taxes.  Let’s say a company builds a large solar array on a manufacturing plant for $100,000.  The 26% ITC reduces that company’s taxes by $26,000 the following year.  If the system is financed, this can mean the costs get spread over time, but the tax break comes all at once – injecting cash into a company’s budget.  

What Does This Mean for the Future?

Does that mean an entire system needs to be installed before the end of the year in order to get the full 26% ITC?  For businesses, fortunately no, this is not the case.  According to the U.S. Department of Energy, a solar project just needs to commence in the calendar year 2020.  That means at least 5% of the costs are incurred (expenses are integral to the generation of electricity), and some physical work has to begin on-site.  This needs to be work on the project itself, not preliminary labor like building a fence or clearing a site.   See the Department of Energy website for more details.

This means two things.  First, waiting until next year will make a solar project more expensive because this federal tax credit will get smaller.  Second, many businesses know this, and solar installers will experience a huge rush toward the end of the year.  That’s why it’s time to get a solar estimate today.


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