As solar technologies have improved over the past few decades, both federal and state governments have introduced solar tax incentives to help businesses take advantage of them. The federal government’s tax credit is called the Investment Tax Credit (ITC). How does this solar tax credit work? In this post, we will go over how this tax credit works, how it is currently changing, and which federal tax rates your solar project is eligible for.
The ITC allows you to deduct a certain percentage of your solar installation costs from your federal taxes. Both commercial and residential solar energy systems are eligible for this incentive. The Energy Policy Act of 2005 originally set up the ITC, but that legislation was set to expire in 2007. Then Congress extended the ITC’s expiration date through 2016, and again through 2021. What does the expiration date mean? After the ITC’s expiration date passes, the percentage you can deduct from your federal taxes will drop dramatically. This expiration will greatly reduce the financial incentive for businesses to install solar panel systems in and around their facilities. If you want to install a solar panel system for your business, now is the time to do it so you can take advantage of the higher deduction percentage.
The ITC’s deduction percentage has already dropped over the past few years, and it will continue to do so. From 2016 to 2019, the ITC’s deduction percentage was at 30%, but now it’s at 26%. In 2021, that percentage will drop to 22%, and then it will finally drop to 10% in 2022 and stay at that low level thereafter. If you plan to own your solar energy system, you’re eligible for the ITC, but the percentage of installation costs you can deduct when you file your taxes could vary depending on when you start construction on your solar system.
In order to receive a certain ITC rate, you must have started construction on your solar energy system by a certain date and complete the project by another specific date. For example, to receive the 26% tax credit, you must start your solar construction by 12/31/2020 and complete it by 12/31/2023. To receive the 22% tax credit, you must start construction by 12/31/2021 and complete it by 12/31/2023. Any solar system construction begun after 1/1/2022 will be eligible for the 10% tax credit. You should be aware of these deadlines because they can greatly affect how you get the solar tax credit and which percentage you can deduct from your installation costs.
You need to be able to measure your solar project’s progress in order to qualify for the different ITC deadlines. Your eligibility is determined by two main tests: the Physical Work Test and the Five Percent Test. For the Physical Work Test, you must provide proof that your project’s construction began before the deadline you want to meet. So if you want the 26% tax credit, you must offer proof that your project’s construction began before 12/31/2020. For the Five Percent Test, you must offer proof that you incurred 5% of the project costs by the project deadline, such as 12/31/2020. These costs can include permits, plans, and site assessments, among other aspects of the project. If you meet the requirements of the Physical Work Test or the Five Percent Test by 12/31/2020, you will receive the 26% tax credit.
In order to receive a certain ITC rate, you must have started construction on your solar energy system by a certain date and complete the project by another specific date. For example, to receive the 26% tax credit, you must start your solar construction by 12/31/2020 and complete it by 12/31/2023. To receive the 22% tax credit, you must start construction by 12/31/2021 and complete it by 12/31/2023.
If you want to use the ITC to implement renewable energy technologies in your facility, Verogy can help. We can also help you locate solar tax incentives in your state, such as Connecticut and Massachusetts, so you can afford the costs of your solar project. Reach out to us today to learn more about our solar financing services.