How Much Will the US Solar Tax Credit Decrease in January 2021?

Michael Tobias
Author : Michael Tobias
December 10, 2020
3 Minutes Read
  
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    Solar power is widely used by homes and businesses in many parts of the US. Solar panels are simpler and safer than many other generation systems, since they have no moving parts and no fuels are burned. Since a solar array is not exposed to mechanical wear and combustion, it can last for over 25 years.

    The US federal tax credit for solar power has greatly helped the industry. Since the incentive was introduced in 2006, the US solar capacity has increased by over 100 times, according to the Solar Energy Industries Association. While each state has its own energy laws and incentives, the federal tax credit applies regardless of location. Actually, it can be combined with local incentives to make solar installations even more affordable.


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    As of 2020, the solar tax credit is 26% for both homes and businesses. However, the benefit will drop to 22% starting from January 2021. While a 4% reduction may seem small, the impact adds up when you consider multiple homes or large projects.

    How Much Does the Solar Tax Credit Reduction Affect Me?

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    Starting from January 2021, the allowed tax deduction for going solar will drop. For example, a 6-kW home solar system can cost around $18,000, and the tax credit in 2020 is $4,680. However, when the 22% credit comes into effect, this benefit is reduced to $3,960. The dollar difference in this case is $720, which may seem small for a power generation system. However, if there are 10,000 homes installing a 6-kW solar array each, they are missing an opportunity to deduct $7.2 million in federal taxes!

    In the commercial and industrial sector, the solar tax credit reduction is evident, even for individual projects. For example, a 200-kW solar array can cost between $350,000 and $400,000. In this case, a 4% drop in the federal tax credit represents $14,000 - $16,000.

    Since the federal tax credit is a percentage, its dollar value increases along with the project scale. Any homeowners or businesses who are considering solar power can claim an additional benefit by acting fast.

    Getting the 26% Solar Tax Credit in December 2020

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    Fortunately, the solar tax credit is based on the date when you start the installation. This means that any projects beginning in December 2020 can get the 26% benefit, even if completed until 2021. The deadline to start operating is December 31, 2023, or otherwise the project in question loses the tax credit. However, solar panels are characterized by their quick and easy installation, and residential projects are normally completed in just a few days.

    If you are a homeowner or business manager who is considering solar power, starting before the end of 2020 will yield you a larger tax credit. In 2021, there will still be a 22% incentive available during the entire year. However, the reduction is more drastic in 2022:

    • The tax credit will only stay available for businesses, and no longer for homes.
    • The value of the tax credit will be reduced to only 10%.

    Assuming a 200-kW solar array has a cost of $400,000, like in the example above, the tax credit drops from $88,000 to $40,000. On the other hand, a 6-kW home solar system loses the $3,960 benefit completely. Solar power systems are becoming more affordable each year, but major cost reductions are necessary to match the loss of a 26% tax credit.

    Using the Solar Tax Credit in New York City

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    In 2019, Local Laws 92 and 94 made sustainable roofs mandatory for many NYC buildings, and the requirement can be met with either solar panels or green roofs. However, solar panels have some advantages in this case:

    • They are eligible for the federal tax credit, while green roofs are not.
    • They are easier to install and service, and they are suitable for more roofs

    Solar panels are also a better option from a financial standpoint, especially when you consider the high electricity prices of New York City. The requirements of LL92 and LL94 are mandatory for all the roofs they cover, but you can still get a solar tax credit in the process.

    Tags renewable energy | Solar Power | clean energy | solar panels | solar incentives | federal tax credit

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