Skip to main content

Residential ITC Phasedown

Share

What Homeowners Need to Know About the Federal Solar Tax Credit Phasedown for Residential Solar Energy Systems

There are two federal tax credits that incentivize solar investments: (1) the Section 48 Investment Tax Credit (ITC) available to businesses who invest in solar energy systems; and (2) the Section 25D residential solar energy credit that may only be claimed by individuals who purchase a solar energy system, typically installed on the roof of their home.

These two federal solar tax credits currently give similar benefits and both will drop from 30% to 26% on January 1st, 2020; however, there are some important distinctions between the credits. You may have heard about “safe harbor” provisions that allow businesses to lock in the 30% rate if a project “commences construction” in 2019 and is completed before January 1, 2024. This safe harbor only applies to business-owned systems and is not available for systems purchased by homeowners for residential use.

Please note that this document is written for background purposes only and should not be considered tax or legal advice. For a more detailed application of these laws to your specific situation, please consult a tax professional.

Here’s what you need to know:

  • If a homeowner buys the solar energy system outright (either paying cash or financing with a loan), they cannot use any commence construction safe harbor provisions. To receive the full 30% residential solar tax credit, the system must be “placed in service” before the end of the day December 31, 2019. It is not enough to have signed a contract, or to have made a down payment or even to have begun construction. There is no bright-line test from the IRS on what constitutes “placed in service,” but the IRS has equated this with completed installation in a Private Letter Ruling. The residential credit is claimed on the tax return for the year in which the qualifying expenditures are incurred, and the tax rules say the costs are incurred when the system installation has been completed. The 25D tax credit will step down to 26% in 2020, 22% in 2021, and 0% starting in 2022.
  • If a homeowner buys a newly built home with solar and owns the system outright, the year that they move into the house sets their credit eligibility. Expenditures are generally treated as incurred when the original installation of the solar energy system is completed on an existing home. However, if a new solar energy system is purchased in connection with the new construction of a home, the costs are treated as incurred when the taxpayer begins living in the home.
  • If a homeowner leases the solar system or purchases electricity from the system through a “power purchase agreement” (PPA), then the tax credit is claimed by the company that is leasing the system or offering the PPA. The homeowner is not eligible to claim the tax credit on their personal federal income tax returns at all. The homeowner does not own the system and the tax credit is handled entirely by the company providing the system. (The tax credit claimed by the system owner enables them to offer better lease or PPA terms.)
Resource Type

Browse Resources by Related Topics:

Related Resources

Saturday, Nov 07, 2020

The Solar Vision for 2021 & the 117th Congress

The 2020 election will have tremendous consequences for the future of energy and climate policy in the United States. To meet this moment and provide guidance for the incoming Biden administration and new members of Congress, SEIA has prepared a 100-day legislative and executive agenda. 

Read More
Monday, Nov 02, 2020

COVID-19 Impacts on Tax Equity Markets

COVID-19 is Harming Tax Equity Financing At the outset of the COVID-19 pandemic, we heard scattered reports of medium- and long-term decreases to the availability of tax equity financing, as well as those who faced immediate challenges.

Read More
Monday, Nov 02, 2020

COVID-19 & the Solar Investment Tax Credit

The Solar Investment Tax Credit Has Spurred Job Creation The solar Investment Tax Credit (ITC) is one of the most successful clean energy policies in U.S. history and has helped the industry grow by more than 10,000% since it was enacted in 2006. A long-term extension of the ITC was passed by Congress in bipartisan fashion in 2015.

Read More