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Everything You Need to Know About the Solar Tax Credit

Shannon Higgins

January 2019

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 26% federal solar investment tax credit, known more simply as the ITC. While there are other smaller incentives that help offset the costs of going solar, the ITC is easily the most lucrative, but it's getting much smaller.Updated graph

2019 marked the end of the previous 30% rate. This year, the solar tax credit will stay at 26% before decreasing again to 22% in 2021. This decrease is part of the solar tax credit's decline to 0% in 2022. So, if you want the fastest and biggest return on your solar investment, this is the year to act, and given the demand on solar installers in the only 26% year, the sooner you start your solar project, the better. Below we cover important parts of the ITC and explain why acting now will give you the best return on your solar investment.

What is the ITC?

First established as part of the Energy Policy Act of 2005, the solar ITC is a tax credit for 26% of the solar system cost (with no cap). This can be taken all in one year, or spread out over five years. To qualify for the ITC, you must have a tax liability and you must own the systemleased systems do not qualify.

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. In our current political climate, it is unlikely that congress will offer another extension, so we encourage you to capitalize on the 26% rate now before it's gone.

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What is the ramp down schedule?

The previous 30% rate was active through the end of 2019. This year, the solar tax credit is 26%, so this is the only year to reap this solar rate from this lucrative incentive program! In 2021, the ITC reduces again to 22%. From 2022 onward, the residential ITC no longer exists, but the commercial ITC will remain at 10%. 

While the 22% rate starting in 2021still sounds pretty good, it actually has a sizable impact on the payback period, extending it by a factor of several years in some estimates. When it drops to 0% in 2022 the payback period will extend again 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.  

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.

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.