2021 Update: Solar Energy Qualifies for 26% Federal Tax Credit
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Make it a Sunny New Year!
There is bright news for both homeowners and businesses who are ready to make 2021 the year they finally go solar – the 26% federal tax credit has been extended for another two years! In addition to reduced solar panel prices and ever-increasing rates from sources of traditional electricity, this tax credit makes 2021 the best year to go solar.
- Despite a small bump in the road due to trade tariffs, pricing on solar panels is the lowest it’s ever been (in fact, solar panels have declined in price 99% in the last 40 years).
- The solar Investment Tax Credit (ITC) was scheduled to drop from 26% to 22% at the start of 2021. Instead, the credit will remain available at 26% for both homeowners and businesses for solar projects constructed in the next two years.
- An uncapped 26% federal tax credit on residential solar electric (PV) systems remains in effect through the end of 2022. 2023 will see a step-down to 22%, and the tax credit is currently scheduled to end completely in 2024 unless new legislation is passed.
- In 2021, businesses can get a 26% federal investment tax credit in addition to state rebates.
- Businesses can also take bonus depreciation on solar projects, accelerating the return on investment even more.
Read on for more specifics about each incentive.
Disclaimer: ReVision Energy provides this for educational use only, we are not tax professionals and are not offering tax advice. We recommend all solar customers to consult with tax counsel.
Federal Solar Tax Credits & Incentives
Residential 26% Federal Tax Credit
The 26% federal tax credit is called the “Residential Renewable Energy Tax Credit” and was established by the federal Energy Policy Act of 2005. The 26% includes all cost of labor as well as equipment costs for the renewable energy system. The credit can also be carried forward to future tax years if you cannot take the full credit in the year the system was installed.
Furthermore, the IRS has issued guidance suggesting that battery storage systems, when charged with electricity from solar electric arrays, are eligible for the tax credit.
The credit was originally scheduled to be discontinued year-end, 2015, and then in 2020. However, it was extended again in December 2020 with the passing of the bipartisan stimulus bill in response to the COVID-19 pandemic. The bill introduced the following timetable:
- 26% for systems placed in service after 12/31/2020 and before 01/01/2023
- 22% for systems placed in service after 12/31/2022 and before 01/01/2024
- A homeowner claims the 26% credit on IRS 5695, Residential Energy Credits (PDF)
- The Solar Energy Industries Association has a great solar federal tax incentive FAQ
- Also, see DSIRE – Residential Renewable Energy Tax Credit
Business Energy Investment Tax Credit (ITC)
Businesses, as well as homeowners, can benefit from a 26% tax credit on renewable energy systems, called the energy investment tax credit.
Similarly to the residential program, it was extended by Congress at the end of 2020 and faces a step-down at the end of 2022:
- Through December 31, 2022 – 26%
- Through December 31, 2023 – 22%
- Through December 31, 2024, & All Future Years – 10%
Also similarly to the residential program, IRS tax guidance suggests that battery storage systems are eligible for this credit when the battery system is charged by a solar electric generation system.
MACRS + Bonus Depreciation
Under the federal tax code, renewable energy systems qualify for a 5-year Modified Accelerated Cost-Recovery System (MACRS) depreciation schedule.
The exact benefit of this depreciation is complicated and varies depending on your businesses’ tax rate, but typically it adds up to an additional 25% of a solar energy project’s cost being offset by reduced tax payments.
To further sweeten this incentive, The Tax Cuts and Jobs Act of 2017 increased bonus depreciation to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.
Given the time value of money, this benefit helps make solar energy systems more accessible in the near-term by businesses that will be able to save significant fossil fuel energy costs over the life of the system.