Investment Tax Credit (ITC) is the most important financial incentive for potential solar energy customers.
There is no better time to invest in solar power for your home or business. The purchase of a solar power system will result in a 30 percent federal tax credit by the end of 2019.
The Investment Tax Credit (ITC) is based upon the amount of investment in solar property. It is a dollar for dollar reduction in income taxes for those claiming the credit.
For homeowners in Section 25D Residential ITC, the credit can be applied to his/her income taxes. Section 48 Commercial ITC allows for businesses to apply credit against its tax liability.
Currently, both residential and commercial ITC is at 30 percent which has started construction through 2019. For projects that begin construction in 2020, the ITC steps down to 26 percent, and then to 22 percent for projects that begin in 2021.
Businesses have a higher incentive to invest in solar power through the Modified Accelerated Cost Recovery System (MACRS). This allows businesses to deduct the depreciable basis of property over five years reducing tax liability and rapidly increases the rate of return on solar investments.
Combined with the ITC, on average, businesses can reduce 60% of the overall cost of their solar power system through tax benefits.
The MACRS system is designed to allow businesses to recover capital costs over the property’s lifetime. With the Tax Cuts and Jobs Act in 2017, the bonus depreciation for Year 1 has increased from 50 percent to 100 percent.
How does it work?
Qualifying solar energy equipment is eligible for a cost recovery period of five years. For equipment on which an Investment Tax Credit (ITC) grant is claimed, the owner must reduce the project’s depreciable basis by one-half the value of the 30 percent ITC, equaling 15 percent. This means the owner can deduct 85 percent of the cost of the solar power system.
85 percent of the total system cost is multiplied by the state and federal tax rates the business carries. That dollar figure is the total amount a business can receive in tax depreciation benefits in year 1.
*Please discuss with your business’s accountant or personal accountant to confirm that your business qualifies for the MACRS system, to identify your business’s tax rates, and to fully understand your tax liability.