Federal Solar Tax Credit 2021- 2022

The 26% Solar Tax Credit Is Still Available Through 2022

Back in December 2020, Congress extended the 26% federal tax credit for solar power until the end of 2022. With the original phase-out schedule, the solar tax credit was decreasing to 22% in 2021, and then to 10% for businesses only in 2022 (0% for homeowners). This benefit is officially called the Investment Tax Credit (ITC), and it has been available since 2006.

According to the Solar Energy Industries Association (SEIA), the ITC has contributed greatly to the growth of solar power in the US:

• On average, the US solar capacity has increased by 42% annually during the last decade. Since the ITC first became available in 2006, the solar industry has grown by more than 10,000%.
• The solar federal tax credit was originally 30%, but it was reduced to 26% in 2020.
• Solar power is the fastest growing electricity source in the US: the installed capacity surpassed 100 gigawatts early in 2021, and the growth forecast is 250-300 gigawatts of cumulative capacity by the end of 2026.

Home solar systems are eligible for the ITC under Section 25D of the US Internal Revenue Code, while commercial solar projects are eligible under Section 48.

The benefits of solar power systems go beyond clean electricity at a low cost – the solar industry also creates many jobs. According to the US Bureau of Labor Statistics, the occupation with the 5th highest growth forecast for 2020-2030 is solar photovoltaic installer, with an expected 52% increase in employment.

How Much Does the Federal Solar Tax Credit Save?

Since the solar ITC is based on a percentage calculation, the dollar amount saved will depend on project costs. However, savings at each project scale can be estimated with the typical solar installation costs from the latest SEIA quarterly report:

Market Segment	Average PV System Price	26% ITC per Kilowatt
Residential	$3.06 / watt	$795.60
Commercial	$1.45 / watt	$377.00
Utility Scale, Fixed Mount	$0.89 / watt	$231.40
Utility Scale, with Solar Tracking	$1.01 / watt	$262.60

For example, the owner of a 500-kW commercial solar system can expect to invest around $725,000, claiming a tax deduction of $188,500 (26%). If the ITC had decreased to 10% in 2022, as originally planned, the tax credit for this system would only be $72,500 ($116,000 less).

This is a very simplified calculation, and the actual cost of installing solar panels varies depending on project conditions. However, this example shows how  solar PV system owners are saving thousands of dollars with the two-year ITC extension.

How the ITC Could Return With the Build Back Better Act

The US House passed the Build Back Better Act in November 2021. However, Senate approval is still pending, and major changes are very likely in the final version. One of the measures proposed in the Act would greatly benefit the solar industry:

• Increasing the Investment Tax Credit to 30% once again, offering the same benefit that was available before 2020.
• Extending the ITC until 2026, giving homes and businesses five years to go solar with a 30% federal tax credit (2022-2026).

This version of the solar ITC has important differences with the incentive that was available from 2006 to 2019. Solar projects with a capacity of at least one megawatt (1,000 kW) will now qualify for higher tax credits if they meet certain conditions related to prevailing wage, apprenticeship, and domestic content. However, the opposite also applies: the federal tax credit is greatly reduced for projects that fail to meet these requirements.

The following table summarizes the federal tax credit percentages for solar power projects with at least 1 MW of capacity, depending on the conditions met:

Which conditions are met by the solar project?	Federal Tax Credit
BOTH CONDITIONS: Prevailing wage and apprenticeship requirements, domestic content requirements	40%
ONLY prevailing wage and apprenticeship requirements.	30%
ONLY domestic content requirements.	8%
NONE OF THE CONDITIONS ARE MET.	6%

Solar projects below 1 MW are not subject to the prevailing wage and apprenticeship requirements, which means they all qualify for the 30% federal tax credit. However, they can get an even higher 40% tax credit by meeting the domestic content requirements.

The new version of the federal tax credit in the BBB Act also proposes a 10% adder for solar projects located in low-income communities, and a 20% adder if they qualify as low-income economic benefit projects.

The BBB Act would also give solar owners the option to be paid tax credits instantly, instead of waiting until the next tax preparation to subtract them. For example, if you pay $15,000 for a home solar system, you can get $4,500 in cash right away instead of a $4,500 tax deduction on your next declaration.

• Solar projects under 1 MW that meet domestic content requirements can get a full refund of the federal tax credit.
• Solar projects with a capacity of 1 MW or more can get a full refund in 2022 and 2023. The refund decreases to 90% of the tax credit in 2024, 85% in 2025, and 0% in 2026.
• This doesn’t mean the tax credit is lost. Solar owners can still wait until the next tax declaration to deduct the tax credit, they only lose the option of an earlier cash refund.

If the ITC extension proposed in the BBB Act gets approved, the SEIA is forecasting an additional 43.5 GW of solar power deployed by 2026. In this scenario, the US would surpass 300 GW of installed capacity by the end of that year.

IMPORTANT NOTE: The information in this section is just a proposal as of January 2022, and these benefits will only become available for solar owners if the BBB Act is passed without changes to the ITC extension. This article is only informative, and not intended as tax guidance.

How Congress Has Helped Other Renewable Initiatives 

Solar solar power is not the only renewable technology that received a tax credit extension in December 2020. The 60% Production Tax Credit (PTC) for wind power also received a one-year extension, covering 2021, but this benefit is no longer available.

The outlook is even better for offshore wind power, which received an Investment Tax Credit just like solar power. The offshore wind ITC is 30%, and it will be available for all projects that start construction before the end of 2025.

The congress bill also assigned $35 billion for energy research and development, and the following are some clean energy technologies covered:

• Solar power = $1.5 billion
• Wind power = $625 million
• Geothermal power = $850 million
• Hydroelectricity and marine power = $933 million
• Energy storage = $1.08 billion
• Grid modernization = $2.36 billion
• US Department of Energy ARPA-E program = $2.9 billion

Unlike the tax credit extensions for solar and wind power, this R&D fund is not expected to have a short-term impact. However, promising technologies could reach the energy industry in the next decade, creating investment opportunities.

Take Advantage of the Investment Tax Credit

For information on commercial solar installations, financing or rebate management, please contact Pro Star Energy. From conception to installation, Pro Star energy consultants work with you to achieve maximum energy efficiency savings for your business. No solar project is too big or too small, so reach out today.