It is true that the Federal Tax Credit, known as ITC, decrease in 2023 from 30% to 22% and sunsets in 2024 (no pun intended). NO!
The Biden administration passed the deficit reduction act that extended the ITC 10 more years until 2033 at a flat 30%.
The ITC is a credit on one’s taxes, not to be confused with a deduction. With a deduction you only garner the benefit as a fraction of the deduction amount, based on your tax bracket. A credit is a dollar for dollar reduction off the tax liability you have for that filing.
Example:
- If you are entitled to a 6,000 dollar tax deduction from something and you are in the 20% tax brackets, you save 1,200 dollars off your taxes.
- $6,000 x 20% = $1,200
- If you are entitled to a tax credit of $6000, say for the purchase of a photovoltaic solar system or electric car the government will pay you back $6000.
- By the way, that 6000 dollar refund is exactly what you would get if you purchase $23,000 solar system.
So you can see a tax credit is much better than a deduction. With a tax credit, you get 100% of the tax credit dollars back to you. And if you can’t use all that credit in one year the IRS allows it to be spread over 3 years if need be.
How does one qualify for these ITC, Want to read more?
For homeowners, the requirements to qualify are straight forward. They need to have their system installed and inspected, by the government permitting entity, confirming 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 in 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.
Want to read more?
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 ITC under the safe harbor rules.