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The Declining 26% Solar Tax Credit: Critical Factors to Know

Shannon Higgins

February 2020

One of the many factors that have contributed to the massive expansion of solar energy over the last decade are solar incentive programs. Among the largest and most impactful of these incentives is the federal solar investment tax credit, known more simply as the solar ITC. While there are other smaller incentives, the ITC is easily the most lucrative, but it's getting much smaller.2020 Solar Tax Credit Graph

2019 marked the end of the solar ITC's 30% rate, which had been in place for more than a decade. For 2020, the solar tax credit dropped to 26%. In 2021, it's scheduled to decrease again to 22% before ending entirely for residential by 2021.

Obviously, the big takeaway is that if you want the fastest ROI for your solar investment, don't wait. As we get closer to these deadlines demand will grow and so will install backlogs, so the sooner you start your solar project, the better. Below we cover a few additional facts about the solar ITC ramp down.

 

What is the ramp down schedule?

The previous 30% rate was active through the end of 2019. 2020 is the only year at 26% before the ITC reduces again to 22% in 2021. From 2022 onward the ITC will no longer exist for homeowners, but the commercial ITC will remain at 10%. 

While 4% less than previous years, 2020's 26% rate still has a sizable impact on the payback period, reducing it by a factor of several years in some estimates. When it drops to 0% in 2022 the payback period will extend considerably. So, if you're inclined to turn Arizona's most abundant natural resource into immediate energy savings, we strongly recommend grabbing the 26% rate before while it's still here.  

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How can I claim the 26% solar tax credit?

To be eligible to claim the 26% tax credit, your solar energy system must be installed, fully paid for, and commissioned by your power utility in 2020. Only purchased systems apply. If you're leasing, the tax credit goes to the lease holder. To file your taxes claiming this incentive, you'll need to complete the IRS form 5695 - Residential Energy Credits. We strongly recommend speaking with an account to cover the intricacies of filing and claiming your 2020 solar tax credits to ensure you've completed it properly.

 

Will it get extended?

The ITC was first established as part of the Energy Policy Act of 2005. The incentive's original expiration date was extended twice, with the most recent extension taking place in  2016. That extension detailed the current ramp down schedule that phases out the tax credit completely for homeowners by 2022. There was another extension proposed in late 2019, but it did not pass in Congress. There is always a chance that another bill to extend some version of the ITC will be proposed in late 2020, but since this is an election year, distractions abound in Washington. We strongly encourage you to capitalize on the 26% rate now rather than gamble on unknown legislation.

Sun Valley Solar Process

Going solar involves many steps as well as coordination with outside entities for permitting and commissioning, so getting your project started as soon as possible is critical. Plus, installers like Sun Valley Solar Solutions are seeing tighter installation schedules than normal as people rush to make the 26% deadline. 

At Sun Valley Solar, we always say, "The best day to go solar is yesterday" and with each passing day, that hyperbole holds more and more truth. With the 26% ITC decreasing at the end of this year, going solar now will ensure the biggest and fastest return on your solar investment. Contact one of our qualified solar integrators to start your solar project today!

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*This blog has been updated since it's original publication of 1/15/2019 to reflect the 2020 solar tax credit rates.