Federal Income Tax Credit (Investment Tax Credit or ITC)
In 2020, a federal income tax credit is available for 26% of the total cost of purchase and installation (including sales tax) of a solar photovoltaic system provided the solar system owner has sufficient tax liability. This tax credit is a dollar-for-dollar reduction in taxes owed and can be used by either individuals or businesses. Consult your tax adviser to learn how this tax policy affects you.
IF installation occurred in 2019, the tax credit is 30%. If installed in subsequent years, the federal tax credit is lower. In 2020, the tax credit is 26%. In 2021, the tax credit is 22%. In 2022, the residential tax credit goes to zero (0) and the commercial tax credit goes down to 10%. This 10% tax credit for businesses becomes permanent for subsequent years. [Clean energy advocates propose a five-year extension of the tax credit at 30% to continue the growth of clean solar energy and because fossil fuel industries have been subsidized for a long long time. Contact your member of Congress to support the Renewable Energy Extension Act.]
Individuals use tax form 5695 (see line #1 on the form for “qualified solar electric property costs”). The electricity generated must be used to power a home that you live in at least part of the year.
The business that installs, develops and/or finances a solar project claims the credit using tax form 3468. Businesses also benefit from modified accelerated depreciation schedule (MACRS) over 5 years, plus a double-counting bonus of half of the federal tax credit (ie half of 26%) of the system cost. If a commercial project is started in one year and finished in another, the owner or developer may benefit from the “commence construction” clause.
There is no upper limit on the value of this tax credit. The credit can be used more than once if you are installing solar in a subsequent year provided you meet all other qualifications.
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