By: Isaac Baker
Business owners, nonprofits and homeowners are moving quickly to take advantage of one of the most lucrative clean energy policies, the Solar Investment Tax Credit, on track to step down in 2020.
This article covers that lucrative policy — the 30% federal tax credit — which has been the most important driver for the economics of solar PV technology in the U.S. since it was enacted in 2006. The first thing to know is that there are two tax credits provisions for solar PV in the tax code: the Business Energy Investment Tax Credit (IRC Section 48) for businesses and nonprofits and the Investment Tax Credit (IRC Section 25D) for residential installations. Both policies provide a credit valued at 30% of the total installed cost of the system (including equipment, labor, overhead, etc.) to the owner of the system.
This policy has even helped countless nonprofits and businesses who either don’t pay federal taxes or don’t have tax liability, but are able to see meaningful savings by “selling” the tax credit on a market that has formed around this policy. Through Resonant Energy’s Hybrid Ownership Program, your organization can exchange the tax credit for a discount on the total solar array cost.
In 2015, the tax credits for solar were set to expire and Congress passed an omnibus energy bill that extended the tax credit for both solar and wind (while also opening up public lands for oil exploration as the compromise). This extension came with a built-in sunset, on the eve of which we now stand in 2019. The full schedule for non-residential projects will be a step down from 30% to 26% in 2020, 22% in 2021, and 10% in 2022, where the credit will rest until policy makers go back to the negotiating table. Residential projects will follow the same schedule, except the credit will go to 0% in 2022 (Fig 1).
As this schedule steps down, one of the key questions for projects is how you secure your place in one year or the next. The IRS has issued a ruling (Notice 2018-59) determining that the project owner must have spent at least 5% of the cost of the project in order to secure the value attributable to a given tax year (this ruling is known as the “safe harbor” provision). This can most easily be demonstrated by signing an agreement in 2019 and making at least one milestone payment towards your project to ensure that you can claim the full 30% tax credit value — even if the system is not ultimately placed in service until 2020.
As you consider your options, Resonant Energy is here to help you navigate the solar process with detailed design support, competitive bidding, and policy knowledge and ensure that you get an optimal financial outcome with your system. Learn more about our projects here and let us know when you’re ready to take the next step for your organization.
How did the tax credit originally get passed?
The solar tax credit was first passed with the passage of the Energy Policy Act of 2005 (under the George W. Bush administration). The tax incentive was extended from its original end date just a few years later in 2008 as part of the Emergency Economic Stabilization Act of 2008, often referred to as “TARP” funding, named after the section called the Troubled Assets Relief Program. This policy extended the credit through 2016, at which point it was once again extended with its full 30% value through 2020, as noted in the article above.
Can the tax credit carry forward if I don’t use it all in one year?
Yes, the tax credit can carry forward, meaning that if your organization does not have sufficient tax liability to use up the credit in the first year you can claim the difference on the following year’s tax return (and so on). However, there is no specific guidance as to the treatment of unclaimed credits once the ITC fully sunsets, which may be as soon as 2022. While you may be able to roll your credits over beyond that, it is best to be conservative and to ensure you can use your tax credit value by 2022.
How do I file for the tax credit?
Residential: Complete IRS Form 5965 to demonstrate the amount of qualifying solar expenditure you’ve made
Add your renewable energy credit information to your typical form 1040
When does the tax credit get “generated”?
You are eligible for your solar tax credit as soon as your array is “placed in service.” This means that system must have received all necessary permission from local inspectors and the utility. The utility grants you “Permission to Operate” (PTO) after its inspection, after which point you can turn on the array. This is the date from which you can claim your credit. For example, if you sign a contract in December 2019 but the system isn’t operational until February 2020, you must claim the tax credit in your 2020 return.
Note: Resonant Energy strives to provide clients with top-tier guidance on solar PV. However, we are not tax specialists and what we have written should not take the place of advice from a tax professional. We recommend that you consult your advisor before taking the next step on solar to ensure that these policies work for your organization.