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Understanding the Federal Tax Credit for Solar Energy in 2021

By April 27, 2021Blog

When planning a new solar installation or investment in solar energy, it’s important to understand all related incentives and credits that can be leveraged to lower costs or create a solar energy financing plan. Our experience as a solar energy company in California allows us to provide many insights for state incentives, but one of the most common and useful credits for new solar work is the Federal Solar Tax Credit, also called the ITC or investment tax credit. Let’s take a closer look.

How the Federal Solar Tax Credit Works

This tax credit is a federal incentive designed to encourage the installation of new solar systems in the United States – and it works very, very well. Since the Federal Solar Tax Credit was created back in 2006, solar growth in the country has leaped by an annual average of 52%, for total solar industry growth of more than 10,000%.

The credit’s approach is quite simple: It offers a high percentage tax credit that can be claimed by a tax paying entity during the year that their solar installation commences construction (or relevant solar systems were purchased, etc.). The credit is available for both residential and commercial solar installations, although the rules differ slightly depending on which is being used.

The Solar Tax Credit in 2021 (and Why Now Is the Time for a Solar Project)

The Federal Solar Tax Credit has set terms that expire after a given time period in accordance with federal budgeting decisions. Without fail, the credit has been renewed every time the expiration data has approached, but it is renewed with shifting terms depending on the current state of the solar industry, government goals, and other factors. In 2021, for example, the tax credit has been set at 26%.

This is very important for organizations to understand, because it does affect future plans for breaking ground on a new commercial solar installation: The commercial credit can only be taken based on the rate of the year when the solar project was physically started, or similar metrics for more unique cases (the IRS has defined this more clearly for the commercial credit, which differs from how the residential credit is calculated). Currently, the tax credit is set for 26% for both 2021 and 2022. However, in 2023 is will drop to 22%, and in 2024 the credit program is set to expire entirely for residential purposes and limited only to 10% for commercial solar installations.

This is still subject to change in the future, similar to how it has been updated in the past. But as it stands now, 2021 and 2022 are by far the best years to break ground on solar project and realize the associated tax benefits, especially as overall trends have seen the credit rate decrease.

How the Credit Works When Purchasing Electricity

Certain solar power situations involve leasing installations or the electricity they produce. Some organizations, for example, may have solar power purchase agreements (PPAs) with the owners of existing solar installations. When this occurs, the company leasing the system or offering the PPA is able to claim the Federal Solar Tax Credit for qualifying solar properties.

One last note – we understand that every situation is different and that a variety of business factors can affect plans for credits or other incentives. If you want more detailed information, please contact us today to arrange a consultation so we can discuss your solar energy options.