What the Solar Tax Credit Extension Means

The Tax credit for installing a solar system on your home or business has been around in some form or fashion since the Energy Policy Act of 2005. Also known as the solar Investment Tax Credit or ITC, this federal program allows anyone who purchases a photovoltaic solar system (one that produces electricity) to now deduct 26% (down from initial 30%) of the installed cost from one’s federal income taxes. The credit applies to both residential solar, as well as commercial applications and currently there is no cap on its value. If you’ve been considering investing in a solar system for your home, you’ve likely heard about the Federal Solar Tax Credit (Investment Tax Credit or “ITC”) and its originally planned phase out for homeowners at the end of 2021. What you may not have heard is that in Dec. 2020, the federal spending legislation added two more years to the solar tax credit. The phase out is extended until the end of 2023. The amount of the credit also changes to allow for a 26% credit in 2021 and 2022 with a reduction to 22% in 2023.”

Something that is important to understand about the Solar ITC is that IT IS NOT A REBATE. As its name implies, it is a TAX CREDIT. This means that you receive a credit against federal taxes owed to the IRS. For example, if you purchase a $25,000 solar panel system, you will receive a $7,500 credit against taxes owed. In other words, you must owe the federal government at least $7,500 (in this example) to take advantage of the full credit.

For many taxpayers, taking advantage of the tax credit is straightforward with programs like TurboTax facilitating this credit quite easily. While for others, they simply may not be paying enough federal taxes in any tax year to enjoy the benefits of this federal program. It is important that you discuss any potential tax credits with your tax adviser or a licensed professional as your situation may be unique.

The wonderful thing about the solar investment tax credit, for those who can take advantage of it, is that the federal government gives solar owners 26% equity in their solar system from day one. After all, 26% off any purchase is a substantial incentive. The check you write or the loan you take out is 26% below retail!

In today’s market, many solar financiers offer tax credit financing where they pay the solar installer 100% of the system price, but base the consumer’s monthly payments on 74% of the installed cost. This generally allows for the loan payments to be less than one’s current electric bill for those in high electric rate areas like Southern California Edison and San Diego Gas and Electric (SDGE). These programs often allow consumers up to 18 months to file for the credit and forward the refund to the finance company. Meanwhile, the solar customer has enjoyed lower payments for the entire term.

At Flex Advisers, we understand that navigating the Solar ITC can be confusing. Our experts can answer your questions and are able to provide the information you and your tax professional need to make an informed solar decision.

With the clock running out on the solar tax credit, there’s never been a better time to consider solar savings! Contact us today for a complimentary solar analysis.



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