Solar energy can be a boon for both your bottom line and the environment. 

But the upfront investment can be steep.

Fortunately, the Solar Investment Tax Credit (ITC) can help.

But just how much will it save you, and how do you qualify? Do rebates and other incentives affect the size of your credit? Are there other credits that serve your purposes better?

In this article, we'll answer all these questions and more. By the end, you'll have a clear, comprehensive understanding of the ITC, ensuring you can confidently navigate its intricacies and maximize your returns.

Table of Contents

• Understanding the ITC
• How Is The ITC Calculated?
• How to Qualify for Bonus Credits
• Will The ITC Be Phased Out?
• Labor Requirements
• Benefits for Tax-Exempt Organizations
• How Do Rebates or Other Incentives Affect the ITC?

Understanding the ITC

The ITC is a 30% tax credit that directly reduces your federal income tax liability. It's calculated as a percentage of the cost of a solar system installed during the tax year.

Unlike a tax deduction, which only reduces taxable income, a tax credit like the ITC reduces the tax bill dollar-for-dollar. This makes the ITC very attractive for projects with high initial costs.

The ITC vs The PTC

The ITC stands in contrast to another tax credit that you can take advantage of when installing solar: the Production Tax Credit, or PTC. The  PTC is a per kilowatt-hour tax credit for electricity generated by solar and other qualifying technologies. It's applicable for the first 10 years of a system’s operation. What makes the PTC unique is its alignment with the performance of the solar system – the more energy produced, the greater the credit. Adjusted annually for inflation, the PTC provides a long-term financial benefit, thus encouraging efficient and high-performing solar installations.

Currently the PTC is 2.75 ¢/kWh for systems placed in service in 2022 or later.

The choice between the ITC and PTC largely depends on the scale of the project, sunlight availability, and the total installation cost.

For instance, large-scale solar projects in areas with high sunlight exposure may get more value from the PTC because of the consistent and large-scale production of electricity. Projects in more cloudy or northerly areas, with higher installation costs, might get more bang for their buck from the ITC.

A Credit, Not a Deduction

One of the great things about the ITC is that it is a credit, not a tax deduction. A tax deduction reduces the amount of your taxable income, while a tax credit directly reduces the amount of tax you owe, dollar-for-dollar.

So, for example, if you have a tax liability of $50,000 for the year, and you are eligible for an ITC of $10,000, you now owe $40,000 in federal taxes. If you receive a tax deduction of $10,000, and you have a taxable income of $200,000, you now have $190,000 of taxable income. Assuming, for the sake of the example, that your effective tax rate is 25%, you now owe $47,500 in taxes (25% of 190,000).

Eligibility Criteria

To qualify for these the ITC, your solar system must:

• Be located in the United States or its territories.
• Use new or limited previously used equipment.
• Not be leased to tax-exempt entities. 

How Is The ITC Calculated?

The ITC is calculated by multiplying the eligible tax credit percentage by the system's tax basis, including:

• Solar panels, inverters, and related equipment.
• Installation and certain indirect costs.
• Energy storage devices with a capacity of 5 kWh or more.
• For projects below 5 MW, interconnection property costs can also be included​.

Additional Bonus Credits

Additional bonuses can be claimed for meeting certain conditions:

• Domestic Content Bonus: A 10% increase in the ITC or value for using domestically produced materials and meeting specific cost thresholds​.
• Energy Community Bonus: A 10% increase in the ITC or PTC for projects in designated energy communities, such as brownfield sites or areas impacted by fossil fuel industry declines​.
• Low-Income Bonus: An additional 10% or 20% ITC for projects under 5 MW in low-income communities or qualifying as low-income residential or economic benefit projects​.

Will The ITC Be Phased Out?

Unless renewed by Congress, the ITC will begin to phase out starting in 2032 or once a 75% reduction in annual emissions from electricity production in the U.S. is achieved, compared to 2022 levels. The phase-out schedule includes a gradual reduction in the value of the credits and bonuses over several years​.

Labor Requirements for Federal Solar Tax Credits

To qualify for the full Investment Tax Credit, solar projects must comply with specific labor standards set by the Treasury Department. These requirements focus on fair wages and apprenticeship opportunities. If

Prevailing Wage Standards

• Wage Rates: For the initial period (the first five years for the ITC and the first ten years for the PTC), all construction, alteration, and repair wages must align with the prevailing rates in the project's location. 

Apprenticeship Requirements

• Apprenticeship Hours: A portion of the total construction labor hours must be carried out by apprentices. The percentage of required apprenticeship hours increases over time. It starts at 10% for projects that began construction in 2022, increases to 12.5% for 2023, and reaches 15% for projects starting after 2023.
• Compliance Measures: To meet these requirements, projects must show a good faith effort in employing apprentices. If they fail to comply, they may rectify this by paying a penalty or making up the wage difference, along with a fee, to affected employees.

Benefits for Tax-Exempt Organizations

If you're a tax exempt organization, you can still take advantage of the ITC.

Tax-exempt organizations can benefit through direct payments or transfer of credits. Direct pay allows you to receive a refund for the tax credits, while the transfer of credit permits allows you to sell the tax credits to an unrelated taxpayer​.

How Do Rebates or Other Incentives Affect the ITC?

While rebates and other incentives are typically considered taxable income, they don't affect the credit you receive from the ITC. Even if you receive rebates, which effectively reduce your out-of-pocket expenses, the ITC calculation still uses the original, pre-rebate cost of the system.

As you can see, a combination of credits and rebates can dramatically reduce the upfront cost of your solar system.

The Upshot

Solar energy presents a dual opportunity to enhance your financial bottom line and contribute positively to environmental sustainability. Although the initial investment can be substantial, the ITC can significantly offset it. Understanding these credits, their calculations, eligibility criteria, and their interplay with other incentives like rebates, can dramatically reduce your upfront costs.

But what if you'd like to get started with solar with little or no upfront costs? That's also an option. For more info on that, check out our article on Solar PPAs.