Last Updated on April 7, 2021 by Mary Pressler

Good News! The Solar Investment Tax Credit Has Been Extended Two Years

Solar power is now among the fastest-growing electricity sources globally, and the Investment Tax Credit (ITC) has been of great help for the US solar industry. Since the ITC was launched in 2006, solar power has grown by over 10,000% nationwide, according to the Solar Energy Industries Association (SEIA). On average, the US solar capacity has grown by 52% annually.

The solar ITC was originally 30%, which means you could claim a $300 federal tax deduction for every $1,000 invested in solar power. However, the incentive was already being phased out:

  • 26% in 2020
  • 22% in 2021
  • 10% from 2022 onward, only available for commercial solar installations

The new bill that Congress signed on Monday December 21, 2020, has extended the ITC for two years. Now, the 26% tax credit will stay available for solar projects that start construction in 2021 and 2022. The reduction to 22% has been postponed until 2023, and the reduction to 10% will be applied until 2024.

This is the second time the solar ITC is extended. The program was originally ending in 2016, leaving only the 10% tax credit, but it was extended until 2022. Residential installations are eligible for the ITC under Section 25D of the US Internal Revenue Code, and 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, and its workforce increased by 51% from 2019 to 2020, according to the US Bureau of Labor Statistics.

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How Much Does the Federal Solar Tax Credit Save?

Since the 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 National Renewable Energy Laboratory (NREL):

Project Size in Kilowatts Median PV System Price 26% ITC per Kilowatt
2.5 to 10 kW $3.89 / watt $1,011.40
10 to 100 kW $3.33 / watt $865.80
100 to 500 kW $2.44 / watt $634.40
500 kW to 5 MW $1.40 / watt $364

For example, the owner of a 250-kW commercial solar system can expect to invest around $610,000, claiming a tax deduction of $158,600. On the other hand, if a 2-MW solar array is installed for an industrial facility, the estimated investment is $2.8 million and the tax credit is around $728,000.

With the tax credit reduction to 22%, the $158,600 incentive would have dropped to $134,200, and the $728,000 incentive would have dropped to $616,000. In other words, the 250-kW solar array loses a potential tax break of $24,400, while the 2-MW array loses $112,000.

This is a very simplified calculation, and actual solar power costs vary depending on project conditions. However, the example demonstrates how solar PV system owners will save thousands of dollars with the ITC extension.

How the New Congress Bill Benefits other Renewables

Solar photovoltaic power is not the only renewable technology that benefits from the congress bill, and the Production Tax Credit (PTC) for wind power has also been extended for one year. Currently at 60%, the wind PTC was being reduced to 40% in 2021 and 0% in 2022. Now the 60% PTC will stay available during 2021, before expiring in 2022.

The outlook is even better for offshore wind power, which gets 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 new 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, the new 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.

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