The federal earned income tax credit ITC has been in place since 2005 and has played a major roll in the adoption of solar energy across the country. The credit has allowed homeowners and commercial entities to deduct a significant portion of the cost of their solar system installation from their income taxes, which made solar more affordable. Sadly the administration is allowing this successful tool to sunsets in 2023 (no pun intended). So it is true that the Federal Tax Credit will decrease in 2021 from 26% to 22%, then 10% in 2022 and to zero for residential customers in 2023.
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The ITC is a credit on one’s federal taxes, not to be confused with a deduction. With a deduction you only garner the benefit as a fraction of the deduction amount. Example: if you gain a 6,000 dollar deduction on your taxes from an IRS allowable deductions, and for example you are in the 20% tax brackets, you save 1,200 dollars off your taxes. But with a tax credit, you get dollar for dollar, 100% of the tax credit back to you. example: If you attain a tax credit of $6000, for say the installation of a photovoltaic solar system or electric car purchase, the government will pay you back $6000. So you can see a tax credit is much better than a deduction. And by the way, that 6000 dollar refund is exactly what you would get if you purchase $23,000 solar system in 2020.
How does one qualify for these ITC.
For homeowners, the requirements to qualify are straight forward. They need to have their system installed and inspected, by the permitting entity, that the system is ready to be placed in service by the end of the tax year to be eligible for the appropriate ITC. That does not mean the utility has installed the new “Net Meter”, that can come later and it will not influence one’s eligibility.
For commercial projects the law is more nebulous, as it gets into the concept of “Safe Harbor” The IRS has established a provision to the ITC tax law called safe harbor, which allows commercial customers to qualify for the tax credit, of the current year, by beginning construction on a solar project, even if completion is off in the distance. The concept of what is “beginning construction” is what makes safe harbor blurry and requiring some consult from a tax professional.
In general, the practice of safe harbor is interpreted to mean either 5% of total project cost have been incurred, or beginning physical work of a significant nature on a project. Significant nature is a term that is open for interpretation and again ARE Solar recommends consult with tax professionals. “Project cost” refers to cost related to the solar photovoltaic of the project that qualifies for five-year accelerated depreciation and ITC. Items such as the purchase of photovoltaic panels, racking, and inverters all qualify.
While both methods qualify and are considered acceptable proof of beginning construction and demonstrates that work has been initiated to qualify under the safe harbor rules, ARE Solar recommends a combination of both methods to reduce any chance of an IRS negative interpretation of the intent of the customer. By purchasing a minimum of 5% of the solar equipment and having work initiated at the site one better insures the 2020 ITC under the safe harbor rules.