The federal solar Investment Tax Credit (ITC) is one of the most important policy mechanisms to support the deployment of solar energy in the United States. The California Solar & Storage Association and CohnReznick partnered to provide additional information to explain the details of the ITC extension to 2021, and to help address questions on tax treatment and eligibility of certain costs related to the ITC.
We developed this members-only fact sheet which covers frequently asked questions on a range of topics, including details of the extension of the ITC, depreciation treatment, eligibility to use ITC for storage and other eligible costs, rollover, rental properties, placed in service rules, and other issues.
We also hosted a webinar to discuss a number of financing questions pertaining to the ITC, including a roundtable with tax experts from the lending, developer, and investor perspective. The recording of the ITC webinar is available to members.
Of course, as with all information related to tax treatment, please note that the information in the fact sheet is general in nature and should not be treated as tax advice. The facts and circumstances for a specific case related to the ITC will help to determine the ultimate outcome, so if you have detailed questions, please seek counsel from an experienced tax accountant and/or attorney prior to moving forward with any development and/or investment plans.
What is the ITC?
The ITC is a 30% federal tax credit for solar installations on both residential and commercial properties, reducing the tax liability for individuals or businesses that purchase qualifying solar energy technologies.
The ITC drives growth in the industry and plays a vital role in creating new high-wage jobs, spurring economic growth, ensuring U.S. global competitiveness, and lowering energy bills for consumers & businesses. As a stable, multi-year incentive, the ITC encourages private sector investment in solar manufacturing and solar project construction. The solar ITC is the cornerstone of continued growth of solar energy in the United States.
WHY IS THE ITC IMPORTANT FOR THE SOLAR INDUSTRY?
The ITC has helped annual solar installations grow by over 1,600 percent since the ITC was implemented in 2006 - a compound annual growth rate of 76 percent. The certainty and stability of this policy has allowed the solar industry to develop long-term investments and spur competition and technological innovation, which in turn lowers costs for consumers and leads to job growth in California communities. Today, California’s solar industry employs over 54,000 people-more than the investor owned utilities combined.
WHAT ARE THE DETAILS OF THE 2015 ITC EXTENSION?
The 30% federal solar investment tax credit for homeowners and businesses was scheduled to expire on December 31, 2016. However, a provision in the Consolidated Appropriations Act, 2016, (H.R. 2029) extended the ITC through 2021, with a gradual ramp down starting in 2019. Specifically, the law extends both section 48 (commercial) and 25D (residential) tax credits at the current 30% level until the end of 2019, followed by a two-year phase out:
2015 – 30% (existing law)
2016 – 30% (existing law)
2017 – 30%
2018 – 30%
2019 – 30%
2020 – 26%
2021 – 22%
The 10% credit for Section 48 (commercial) projects only remains in place after 2021, per existing tax law. The extension also included commenced construction language that allows for two additional years to complete large-scale projects at the higher rate, as long as they are placed in service by December 31, 2023.
WHAT IS COMMENCE CONSTRUCTION?
In addition to extending the expiration date of the ITC, Congress added a provision that allows solar projects to be eligible to claim the federal tax credit under Section 48 (commercial) if they commence construction before the expiration date, rather than the previously rigid requirement that projects be fully completed and in-service by the expiration date. If construction began before the end of 2021, as long as the solar projects are placed in service by December 31, 2023, those projects can claim a tax credit under Section 48 larger than the 10% permanent tax credit. This is particularly important for large projects that have long construction timelines.