How Does the Solar Investment Tax Credit Work?
The Investment Tax Credit (ITC) is currently a 26 percent federal tax credit claimed against the tax liability of residential (under Section 25D) and commercial and utility (under Section 48) investors in solar energy property. The Section 25D residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when homeowners purchase solar systems and have them installed on their homes. In the case of the Section 48 credit, the business that installs, develops and/or finances the project claims the credit.
A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 26 percent of the basis that is invested in eligible solar property. The ITC then steps down according to the following schedule:
- 26 percent for projects that begin construction in 2021 and 2022
- 22 percent for projects that begin construction in 2023
- After 2023, the residential credit drops to zero while the commercial credit drops to a permanent 10 percent
- Congress passed a two-year delay of the ITC phasedown in 2020.