The Solar Investment Tax Credit (ITC) is one of the most popular and successful federal policy mechanisms ever enacted to support renewable energy in the US. In the 15 years since its enactment, there has been 59% compound annual solar growth nationwide. With the step-down of the tax credit beginning at the end of 2022, potential solar customers have limited time left to take full advantage of its benefits.
What is the ITC?
The ITC is a tax credit that can be claimed on federal corporate income taxes for 26 percent of the cost of a solar photovoltaic (PV) system that is placed in service during that year. The tax credit is claimed against the tax liability of residential and commercial investors in solar energy property. This credit is used when homeowners purchase solar systems outright and have them installed on their homes or when businesses install, develop and/or finance solar projects.
History and Future of the ITC
The ITC was originally established by the Energy Policy Act of 2005 and was set to expire at the end of 2007. Due to the success of the program Congress has extended its expiration date multiple times, most recently in 2020. That extension set up the tax credit to step down to 22 percent for all projects that begin construction in 2023. In 2024 the residential credit will drop to zero while the commercial and utility credit will drop to a permanent 10 percent.
Why Act Now?
The upcoming stepdown will substantially increase your solar project’s total cost. Let’s run the numbers with a 100 kW array on a multi-home residential unit, retail space, or office building, which costs approximately $200,000.
With the current ITC rate of 26%, your savings would be roughly $52,000. At the end of 2022, those savings reduce to $44,000. In 2024, when the rate drops to 10%, savings are reduced to $20,000. Waiting two years before starting your project can end up costing you $32,000 in tax credit savings.
Investment decisions like this aren’t made overnight. Fortunately, there is still time to save in 2021 and 2022 with safe harboring.
| Typical Industry | System Size | Current Savings | 2023 Savings | 2024 Savings |
|---|---|---|---|---|
| Non-Profits, Small Buildings | 40 KW | $26,000.00 | $22,000.00 | $10,000.00 |
| Realestate, Retail, Large Office | 100 KW | $52,000.00 | $44,000.00 | $20,000.00 |
| Manufacturing | 500KW | $208,000.00 | $176,000.00 | $80,000.00 |
*Approximate ITC savings based on typical industry and system size.
What is Safe Harboring?
Safe harboring is a legal (and sensible) method created by the IRS to freeze the current Solar ITC rate of 26% for up to 48 months. By beginning construction with continuous work, or by investing 5% of the project cost before the December 31st deadline, the IRS will essentially grandfather you into this year’s credit rate, even if your project is not complete.
Be aware that safe harboring involves a much greater level of detail than what we covered here. Renewable Energy World’s article on the subject is a fantastic resource, and we’re always happy to get in touch and share our expertise when it comes to solar projects.
Impact of the ITC Step-Down
According to Energy Information Administration data in 2015 (when the ITC was scheduled to expire at the end of the next year), if the 30% credit was not extended, rooftop solar photovoltaic installations would plunge 94% in 2017 and utility-scale projects would decline 100%, with neither recovering anywhere close to today’s levels even a decade from now. Bloomberg predicted solar installations would drop by two-thirds in 2017, which the Solar Energy Industries Association estimated would cost America 100,000 jobs.
The economic projections aren’t as grim this time around. A study from Bloomberg estimates that the loss of the tax credit will cause solar capacity to only quadruple, instead of quintuple, by 2022, which is still a substantial increase. A Wall Street Journal analysis reinforces this assessment.
So, what has changed over the last few years to mitigate the effect of ITC’s decline? For starters, this stepdown is less severe than the proposed 2015 iteration, which called for a straight drop from 30 to 10 percent. The more gradual step-down, combined with recent legislation that allows homeowners to claim their tax credit as soon as the construction of the system begins (as opposed to when the system is operational), will allow significantly more installs to qualify for a higher credit. Additionally, solar installation prices have continued their sharp decline. The cost to install solar has dropped by more than 70% since 2010, and prices as of Q4 2018 are at or near their lowest historical level across all market segments.
The solar industry will still prosper without the ITC. However, the planned growth will not be as dynamic. Customers should be aware of the impending changes and plan accordingly, but can still be optimistic about sustained industry growth.
As an IPS client, we take care of all applications and permits necessary to complete your project. Our knowledge of state, federal, and utility incentive programs allows us to maximize savings for our customers and source more funding than any other developer. Contact us to get your questions answered and get started today.
Sources
– SEIA