What is the Solar Investment Tax Credit? And Why do these upcoming changes matter? While these changes might not impact a residential owner as significantly, when dealing with large scale Commercial and Utility projects, 4% goes a long way and can save thousands.
The Solar Investment Tax Credit
In order to encourage the growth of solar energy, the federal government implemented an incentive programs in the form of tax returns for a portion of the price of the solar energy system. The Solar Investment Tax Credit was put into place to invigorate the market and encourage further research in solar energy, in hopes that the price of solar would be driven down and the credit could be phased out. When the credit was established by the Energy Policy Act of 2005, it was only supposed to last for 2 years. After an extension, the end date was set for 2016. That is until experts pushed for another 5 years of the credit so the industry could fully mature. Here are the details as it currently stands.
- Changes in the Credit Percentage
- 2016 to 2019: The tax credit will allow residential and commercial solar owners to deduct 30% of the costs for their system.
- 2020: Owners of residential and commercial solar will be able to deduct 26% off of the cost of their system.
- 2021: Residential and commercial solar owners are eligible for a tax credit of 22% of the cost of their system. This will also be the last year of federal tax credit eligibility for residential solar owners.
- 2022 and Beyond: Owners of new commercial solar will be able to claim 10% of the cost of their system.
- Ways to Qualify
As the percentage shifts go on, there are two pathways to meet impending deadlines. There are two major pathways, each with specific guidelines needed to qualify.
- The 5% Test: This method requires the system owner to pay or incur at least 5% of the cost of the project before the construction start deadline. In this case, the “cost of project” only includes the portion of the project that qualifies for five-year accelerated depreciation. However, there is one exception to the rule, known as the “3 ½ month” rule. This means the equipment is treated as received on the date it was paid as long as the physical possession is taken within 3 ½ months from the first payment for the equipment.
- The Physical Work Test: This method involves physical work of a “significant nature” to be done before the deadline. The catch is that only work done on equipment not normally held in inventory is eligible. Therefore, this method isn’t viable in commercial solar installations, with the exception of carports and projects with non-standard racking, due to the standardization of the equipment. On the other hand, both on-site and off-site work counts, making the physical work approach more accessible.
- Transfer Policies
For those who choose to buy solar equipment from after a deadline might wonder if they are eligible to receive the tax credit as well. The answer is yes; however, this is only true when the “project” is passed along instead of just the equipment. Here are some ways to ensure you’ll receive the credit:
- Intangible Rights: These can include a Power Purchase Agreement (PPA), permits, interconnection agreement, or a site lease. In other words, you should look to contract rights because the more you have, the more likely you are to be approved for the transfer of the credit.
- Transferring to a Related Person/Party: The general requirement is that there needs to be a 20% overlap in ownership to be considered related. This is measured by the share of the profits if the company were to be liquidated. While corporations measure this by values in stock, individuals could include their siblings, spouses, parents, and children as related parties.