On Monday 21, 2020, Congress passed a $1.4 trillion federal spending bill and a $900 billion relief bill to mitigate the economic and social impact of COVID-19. The bills cover several areas, but one measure is excellent news for the solar industry - the 26% Investment Tax Credit (ITC) just received a two-year extension.
Originally, the solar ITC would be reduced to 22% in 2021. While a 4% reduction may not seem like much, it represents thousands of dollars for a commercial or industrial solar array. A larger cut was planned for 2022, when the ITC would become 10% for businesses and 0% for homes.
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Solar power systems are much more affordable than two decades ago, but losing the tax credit would make them more expensive in terms of net cost. After the new Congress bill, the 26% solar tax credit stays available through 2021 and 2022. In addition, the reductions to 22% and 10% have been postponed until 2023 and 2024.
Other than having low cost and low environmental impact, solar power has created many jobs in the US economy. There were already 12,000 solar installer jobs in the US in 2019, and this will increase by 6,100 by 2029, according to the US Bureau of Labor Statistics. Only two occupations are growing faster: wind turbine service technicians and nurse practitioners.
How Does the ITC Reduce Solar Power Costs?
When a homeowner or business installs a solar power system in the US, the Investment Tax Credit is calculated with the following procedure:
- Any rebates from local governments or electric utility companies are deducted first.
- The federal ITC is calculated with the solar PV system price after rebates.
- Any state tax credits are also calculated with the PV system price after rebates, but they don’t affect the federal tax credit.
For example, solar installations below 10 kW currently cost around $4 per watt in New York, according to the NREL. This means a 6-kW installation can be expected to cost around $24,000. If this system is installed in the Con Edison service area, the NY-Sun rebate program offers a rebate of $200 per kilowatt. This results in a total incentive of $1,200 for a 6-kW system, reducing the net cost to $22,800.
New York has a 25% state tax credit of up to $5,000, in addition to the 26% federal tax credit. Both incentives are calculated separately with the $22,800 amount, without affecting each other:
- Solar ITC = $22,800 x 26% = $5,928
- NY state tax credit = $22,800 x 25% = $5,700 (the $5,000 limit is applied)
After subtracting the two tax credits, the net cost of this solar power system is $11,872. In other words, the three incentives make the installation around 50% cheaper. However, the net cost would increase to $12,784 with a 22% ITC, and to $17,800 with a 0% ITC.
The ITC benefits both residential and commercial solar power systems, but each type of project is subject to a different section of the Internal Revenue Code. Home solar systems are covered by Section 25D, while installations owned by businesses are covered by Section 48.
Taking Advantage of the Extended Solar Tax Credit
The ITC extension is useful for homeowners and businesses who were considering PV systems, but were unable to start before the 26% tax credit ended. For example, a commercial building scheduled for 2022 would have only received a 10% ITC for a solar array. With the two-extension, a project like this can claim the 26% tax credit that is currently available.
The federal tax credit can also help pay for solar installations that are financed with loans. As the legal owner of the solar array, you receive all tax benefits even if the system was purchased with debt. The tax credit can also help cover energy efficiency measures, such as LED lighting or HVAC replacements.
Energy storage systems can also benefit from the extended tax credit - if they get at least 75% of their charge from an onsite renewable energy system, they are eligible. Unlike solar panels, battery systems are an emerging technology that is still expensive. However, the ITC extension gives two additional years for their cost to decrease. If there is a major breakthrough that drops the cost of batteries in the short term, it can be combined with the 26% ITC.
The two-year extension of the 26% federal tax credit is excellent news for the solar industry, and will also benefit complementary technologies like energy storage. Being able to claim a major tax deduction is a great incentive to invest in solar power. In addition to being clean and renewable, solar power is now among the cheapest electricity sources, achieving lower kWh prices than coal in some regions. Solar power is also creating many jobs in the US, and this trend is expected to continue during the next decade.