Everything You Need to Know About the Federal Investment Tax Credit

Everything You Need to Know About the Federal Investment Tax Credit

If you’ve been thinking about going solar, it's important to understand the potential savings and critical timing involved with the federal investment tax credit (ITC). Here’s a quick primer on what you need to know to make the most of this important solar incentive.

What is the solar federal Investment Tax Credit?

The Energy Policy Act of 2005 created the ITC and included a 30% tax credit on solar projects, as well as tax credits for wind power and other clean energy technologies. It was meant to give the renewable energy industry a boost, but it has done much more than that.

The ITC has been one of the most effective pieces of climate legislation in effect since its inception. It has created hundreds of thousands of jobs and invested billions of dollars into the US economy.

In fact, according to the Solar Energy Industry Association (SEIA), the solar industry has grown by more than 10,000% since 2006. And according to a recent study by Rhodium group, if the ITC remained in place through 2030, this policy alone could push electric power sector emissions down 42% to 48% below 2005 levels.

Unfortunately, the ITC was never meant to be a long-term policy, unlike oil and gas subsidies. It has been extended several times, most recently in 2015 when congress passed a multi-year extension of the solar tax credit with a provision to step down from 30% after 2019.**

Solar ITC step-down through 2024:

  • 2019: 30% for residential and commercial projects
  • 2020-2022: 26% for residential and commercial projects
  • 2023: 22% for residential and commercial projects
  • From January 1, 2024 on: 0% for residential projects and 10% for commercial projects.

**Update! The numbers above now reflect the new ITC extension enacted by Congress as part of the Covid-19 Relief Bill passed December 22, 2020

So what does this mean to you?

As long as you own your solar energy system, and don’t have a third-party ownership agreement, then you are eligible for the tax credit. Even if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” the remaining credits into future years for as long as the tax credit is in effect. And there's no limit to the dollar amount of the credit.

Of course a solar energy project takes time from start to finish, and for residential customers to be eligible for the tax credit their project must be operational by December 31st. So any solar project begun in these last months of 2020 would not be operational in time will now be eligible (!) for the current 26% credit. The strikethrough represents the fact that the Covid-19 Relief Bill passed on December 22, 2020 extended the tax credits for two more years. This means that for residential projects, we are looking at the 26% level from now through December 31, 2022.

This policy is a bit different for commercial solar projects. The regulations allow a customer to “Safe Harbor,” meaning that by December 31st, a project must have either invested 5% of the total cost of the project or started “physical work of a significant nature.” Read more about safe harbor for commercial projects here.

How do I take advantage of the tax credit?

For residential customers, taking advantage of the ITC is simple. Ipsun’s solar consultants will provide you with the needed paperwork and instructions to file for your tax credit.

Ipsun residential solar installation in Bethesda MD

Ipsun residential solar installation in Bethesda MD

It’s important to remember that a tax credit is different from a tax deduction. The tax credit means that you will be able to deduct the full 22% of the total cost of your solar project from your total tax liability, rather than as a deduction from your taxable income.

To claim the credit, you’ll file IRS Form 5695 as part of your tax return. You calculate the credit on the form, and then enter the result on your 1040.

If you end up with a bigger credit than you have income tax due—a $3,000 credit on a $2,500 tax bill, for instance—you can carry the credit over to the following tax year.

Of course, we’re solar experts, not tax experts! This information is meant to be a general guide. You can find all of the policy for residential customers under Section 25D of the IRS tax code. Please make sure to consult your tax advisor for instructions and details about your specific situation.

Federal tax credits can help you save on elements of a whole-home renewable energy improvement project

If your roof needs work before it can support solar, or if you’re thinking about adding on home battery storage or an EV charger, you’re in luck—you can also get a tax credit for these projects. Eligible roofing improvements and home battery storage are included under the ITC, and EV charging installation is covered under the federal EV charging credit.

Tesla Powerwall: If you're installing energy storage on a residential property, it is also eligible for a credit under the ITC—as long as the battery is 100% charged by an on-site renewable energy system like solar. It’s important to know that the battery itself isn’t considered renewable energy because it can also be charged by grid electricity, so in order to get the tax credit your battery needs to be charged solely by renewable energy. You can file for this credit on the same paperwork, IRS Form 5695, as you would for the solar system.


Tesla Powerwall

Ipsun Tesla Powerwall installation in Sterling VA

New roofing: In certain situations, you can deduct your roofing costs under the Energy Policy Act, which would also be filed with IRS Form 5695.

  • If your existing roof lacks the structural strength to support the solar panels, you may need to reinforce it with new joists or sheeting. You may be able to deduct the cost of these upgrades.
  • Another potential deduction would be specialized shingles designed to improve the efficiency of the solar panels.
  • Certain roofing materials, such as metal or asphalt shingles that meet Energy Star requirements, may qualify you for a 10 percent federal tax deduction. This deduction does not fall under the solar tax credit, but rather the Non-Business Energy Property Tax Credit, included on the same tax form as the ITC.

EV Charging:

The EV charging credit is not part of the ITC, rather it is covered under the Alternative fuel vehicle refueling property credit. You’ll use form 8911 to apply for the Federal EV charging tax credit. It covers 30% of the costs with a max of $1,000 credit for residents and $30,000 tax credit for commercial installs.

ev charger

Enel X Juicebox EV charger installed by Ipsun

If you have already installed EV charging since 2017, not to worry; you are still eligible for the tax credit. It retroactively applies for installs from 2017 through 2019. If your install happened before 2020 you will have to file an amended return to claim your charging credit.

How can you support these important climate policies going forward?

Along with the Amicus Solar Cooperative and SEIA, Ipsun’s policy team worked last year to lobby the federal government to extend these important tax credits. We will continue that work with the incoming Biden Administration in hopes that we can extend the credits past the two-year period just granted. We’re hoping that President-elect Biden’s focus on mitigating climate change will make the difference. 

Amicus solar ITC lobby day 2019_11_14-1

Lobbying for ITC extension with Amicus in November 2019

Stay tuned to our blog for updates on this process, and for ways you can help. Right now, the best thing we can all do to support good climate policy is to work to get Georgia’s democratic Senate candidates Jon Ossof and Raphael Warnock elected!

If you have questions about the tax credits, give us a shout at 866-484-7786, or reach out below. We love nerding out with you about tax policy!

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