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Solar Tax Credit

September 27, 2018

The largest incentive for putting solar on a building, other than the desire to protect the environment, is the Investment Tax Credit from the Federal Government.  This tax credit, put into law by the Energy Policy Act of 2005 and extended in late 2015, provides a generous incentive of up to 30% of the total cost of a solar installation.  

income tax credit from the federal government


Tax Credit By Year

  • 2016 to 2019:  The tax credit is 30% of the cost of the system.
  • 2020:  The tax credit drops to 26% of the cost of the system.
  • 2021:  The tax credit drops to 22 of the cost of the system.
  • 2022 and beyond:  The tax credit drops to 10%, and only applies to commercial systems.  


Tax Credit vs Deduction

This law enables tax credits, not tax deductions.  This is significant, as a credit provides that exact amount off of your taxes.  For example, if you owe $10,000 in taxes and put a $10,000 solar array on your business, you would get a $3,000 deduction off your taxes (in years 2016 through 2019).  That would mean you would owe the government $7,000 in your taxes for that year.  

If this had been a deduction, you would reduce your taxable rate by $3,000 - and that would only take about $1,000 off your taxes, depending on what tax rate you are in.  If your tax burden is lower than the $3,000, you can push it forward to the next years taxes.  


Non-Profits and Public Sector Solar PV Implications

Unfortunately, those that do not pay taxes, do not benefit from the largest incentive to move forward with this type of zero carbon distributed energy production.  These two groups also tend to be the most motivated, since they have longer term plans and vision for their buildings that residential or commercial tenants.  For example, a firehouse in town will be needed for the next 100 years, as will a school, police station and municipal building.  They may occasionally move for new construction, but they don't go out of business or turn over the way the private sector does.

On a good note, often non-profits and churches have an alternative.  Donors can purchase and install the array for those entities, benefiting from both the tax credit and the donation in kind.  


Tax Credit Implications of Power Purchasing Agreements

A popular tool in moving solar forward is a Power purchasing agreement (or PPA), where another entity owns the array and the building owner "purchase" the electricity from the owner of the array.  This allows funds or investors to own these arrays over a long time horizon, where often homeowners or businesses can't afford to think that long.  Often, these arrangements lead to less expensive energy rates than provided by the local utility.  In this scenario, the owner of the array, and not the building owner, benefits from the Investment Tax Credit. 


When is the Best Time to Buy Solar

While the cost of solar is dropping 1-2% per year, we feel that the ideal time to purchase solar is between today and 2021. After that, the drop to 10% tax credit will not be offset by the dropping price in solar.  State incentives change year by year, as do local utility incentives.  2018 and 2019 are great years to gather information about your roof and potential PV array size, so you can be poised to make a good decision in 2019 and 2020 and maximize this Investment Tax Credit.  


Posted by Jen Panattoni

Jen loves the city of Chicago and the people that live and work here. Her goals include: Making the city a better place for everyone to live, to eat at all the Mr. Submarine's there are in Chicagoland and... that's it. No other goals. that's all of them.


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