Because the cost of solar continues to decline, one question we field a lot at EnergySage is whether you should wait to install solar panels. And for anyone asking that question in 2019, the answer is as soon as possible: given the looming step-down and expiration of the federal investment tax credit (ITC), solar shoppers who wait until 2020 or later to move forward will be missing out on major tax savings – but just how much?
In this article, we’ll give an overview of the federal tax credit, the timeline for the step-down, and provide some tips for those looking to take advantage of the 30 percent federal ITC before the end of the year.
Please note: EnergySage has written on the topic of the ITC in good faith, with the aim of guiding you to make a well-informed decision about going solar. However, the US tax code is complicated, and what we have written should not take the place of advice from a qualified tax professional. Consult your tax advisor before deciding what is best for you.
What is the federal ITC?
The federal investment tax credit, also referred to as the solar tax credit, allows you to deduct 30 percent of the cost of your solar energy system from your federal taxes. Because this incentive is a tax credit rather than a deduction, you need to have sufficient tax liability in order to take advantage of the incentive. However, if you can’t use your entire solar tax credit in the first year, you can roll remaining credits over into future years.
The ITC is only available to those who purchase their solar panel system: property owners who sign a solar lease or power purchase agreement (PPA) are not eligible for the credit, as the owner of the system claims it for themselves.
You can read more about how to claim the ITC in our step-by-step guide.
Federal ITC step-down timeline
The ITC was supposed to expire in 2016. However, in late 2015, Congress passed a spending bill that included an extension of the credit. The bill stipulates that a solar tax credit will be available to homeowners until 2021, with an important distinction: the 30 percent credit value only lasts from 2016 until 2019. Starting January 1, 2020, the tax credit value drops to 26 percent, before dropping to 22 percent in 2021. And at the start of 2022, the residential solar tax credit expires.
- 2019: the tax credit is 30 percent of the cost of the solar energy system.
- 2020: the tax credit is 26 percent of the cost of the system
- 2021: the tax credit is 22 percent of the cost of the system
- 2022: homeowners can no longer claim the solar tax credit
As far as commercial installations go, the commercial solar tax credit is the same as the residential tax credit up until the end of 2021. When the tax credit expires for homeowners on January 1, 2022, the commercial solar tax credit reduces and remains fixed at 10 percent onwards.
ITC savings: 2019 vs. 2020
While a 4 percent step-down may not seem like much, it can equate to thousands of dollars in savings when you’re buying a solar panel system.
Below are examples of saving differences from 2019 to 2020. We used average cost data from 2019 quotes in the EnergySage Marketplace to calculate an estimated cost for 6 kilowatt (kW) and 10 kW systems in various states. Values have been rounded to the nearest dollar.
ITC savings 2019 – 2020: 6 kW
|State||Average cost of solar ($/W)||Gross cost for a 6 kW system ($)||2019 tax credit value ($)||2020 tax credit value ($)||Difference ($)|
ITC savings 2019 – 2020: 10 kW
|State||Average cost of solar ($/W)||Gross cost for a 10 kW system ($)||2019 tax credit value ($)||2020 tax credit value ($)||Difference ($)|
For some, the difference between claiming the ITC in 2019 and 2020 may be less than $1,000. But, the larger your system is, and the higher the cost of solar is in your area, the more you stand to lose from the ITC step-down.
How to ensure you’re eligible for the 30 percent tax credit
Time is of the essence when it comes to claiming the 30 percent federal ITC; here are some guidelines to follow in order to make sure you maximize your ITC benefit:
1. Start shopping for solar as soon as possible
Installing solar is a big decision (and one you shouldn’t feel rushed on.) The sooner you start shopping, the more time you’ll have to evaluate your equipment, financing, and installation company options.
2. Before signing a contract, ask about timelines
Not every company will be able to install on the same timeline; their calendars vary depending on how many projects are already scheduled, as well as how many installation crews each company has. Before signing a contract, ask each company how soon they’ll be able to install your solar panel system.
3. Start construction before the end of the year
Thanks to the “commence construction” guidance outlined by the IRS, you don’t have to worry about getting your solar panel system fully operational before the end of the year in order to claim the 30 percent tax credit: you just need to start construction. But what does that entail? There are two different tests to determine whether construction has commenced for your solar project: the Physical Work Test or the Five Percent Safe Harbor Test.
Physical Work Test
If construction starts on your solar project prior to the end of 2019, you’re eligible for the 30 percent tax credit. However, not every type of work passes this test; according to the IRS, the work needs to be “physical of a significant nature.” Many on-site tasks for installing residential solar panel systems (i.e. affixing mounting equipment, installing panels or inverters) meet this requirement. Off-site tasks (i.e. permitting, interconnection paperwork, system design) or preparing a property for installation (i.e. tree removal, re-roofing) do not qualify.
Five Percent Safe Harbor Test
If you start construction of your solar panel system in 2019, “physical of a significant nature” or otherwise, and spend five percent or more of your total project costs in 2019, you’re eligible for the 2019 solar tax credit.
Importantly, you can’t simply start your project in 2019 in order to meet these requirements, only to stop construction: you need to continuously make progress on the project and be able to provide proof of the progress, such as regular payments on your system. Additionally, your solar panel system needs to be up and running by December 31, 2023, at the latest.
Compare your solar options on EnergySage
If you’re looking to claim the 2019 solar tax credit, now’s the time to get started on your solar project. When you register on the EnergySage Solar Marketplace, you can receive up to seven quotes from pre-screened installers. All quotes on the Marketplace include solar incentives you’re eligible for, including the federal ITC. If you’d prefer to start with ballpark cost and savings estimates, try our Solar Calculator.