If you have been putting off installing a solar system in your home or business, then the time to act is NOW — because 2019 is the last year that the full 30% Solar Investment Tax Credit ("Solar ITC") will be offered by the federal government. Starting in 2020 the Solar ITC will fall to 26%, and then to 22% in 2021. In 2022, the incentive will be eliminated completely for residential solar systems, and permanently drop to 10% for commercial solar systems.
History of the Solar ITC
In case you are unfamiliar with the Solar ITC — or perhaps you've heard about it, but aren't aware of the details — here is a brief summary:
The Solar ITC program was enacted by the federal government in 2005 per the Energy Policy Act, in an effort to promote the growth of solar energy across the U.S. The program was extremely well-received and popular, and in 2006 it was extended for two years per the Tax Relief and Health Care Act. In 2008, it was extended again — this time for eight years — per the Emergency Economic Stabilization Act. This legislation also ended the monetary limit for solar electric residential installations, and allowed businesses paying the alternative minimum tax (AMT) and utilities to qualify for the tax credit. In 2015, it was extended for a fourth time until 2020, at which time the above-mentioned reductions will kick-in for both residential and commercial solar systems.
How the Solar ITC Program Works
While some government tax credit programs are rather convoluted and difficult to grasp, the Solar ITC program is refreshingly simply and straightforward. It is a direct dollar-for-dollar reduction in the federal income tax amount owed by a person (residential solar system) or business (commercial solar system).
Solar ITC for Residential Solar Systems
The specific dollar amount of the Solar ITC is 30% of the investment in an eligible solar property in which construction commences in 2019. Per a guidance issued by the IRS in June 2018 (Notice 2018-59), there are two ways that residential taxpayers can establish that construction on their solar system legitimately began in 2019:
1) Demonstrating that a significant amount of physical work has taken place in 2019 (a.k.a. "Physical Work Test").
2) Meeting the 5% Safe Harbor Test, which involves paying or incurring 5% or more of the total cost of the property in 2019.
With either condition, residential taxpayers must also maintain a continuous effort to complete construction (barring things like severe weather, natural disasters, labor stoppages, and other unavoidable delays), and the project must be placed in service by the end of the fourth calendar year after the year when construction started. For example, if construction began in 2019, then the full 30% Solar ITC would apply if there was a continuous effort to complete the construction, and if it was placed in service no later than December 31, 2024.
In addition, it's possible for a residential taxpayer to satisfy both conditions: the Physical Work Test and the 5% Safe Harbor Test. In such cases, construction will be deemed to have started on the date that the taxpayer satisfied the first condition. For example, if the Physical Work Test is established on July 1, 2019 and the Safe Harbor Test is established on February 1, 2020, then the construction start date will be deemed to be July 1, 2019.
Solar ITC for Business Solar Systems
Under the rules of the Solar ITC program, a business that installs, develops and/or finances a commercial or utility-scale solar system is eligible to claim the credit on its federal tax return. Provided that construction starts by December 31, 2021, a business may still qualify for the 30%, 26%, or 22% credit if the project is placed in service by no later than December 31, 2023. As noted previously, the credit drops to 10% for projects in which construction began on or after January 1, 2022.
To learn more about taking advantage of the 30% Solar ITC before the reductions start on January 1, 2020, contact Harrimans Inc. – Solar Energy System today at 866-777-WARM (toll-free throughout Florida), or contact us through our website.
We have been delivering quality customer service for over 50 years. With over 20,000 satisfied customers and an A+ rating from the Better Business Bureau — along with hundreds of testimonials from delighted customers available for your review — we are committed to providing you with the finest solar equipment available. We welcome the opportunity to earn your business!
While Harrimans has made an effort to explain the Solar Tax Credit we highly recommend contacting your tax professional to review your specific tax situation.