The 2020 Federal Solar Tax Credit Explained

It’s finally 2020, and the esteemed 30% Federal Solar Tax Credit, the Income Tax Credit that homeowners can get for installing solar, has come and gone. While many solar companies have been claiming that the Solar Tax Credit is “going away”, this only partially true: the 30% credit has gone away, but the Solar Tax Credit itself is still around. Let’s take a look at what the Solar Tax Credit is, what it has done for the solar industry, and what remains in 2020. The History of the Solar Tax Credit The Federal Solar Tax Credit, or the Solar Investment Tax Credit, was implemented in 2006 in the Energy Policy Act to promote the growth of solar installations on home and businesses in the US. It was extended twice, then in 2015, through the Omnibus Appropriations Act, was extended through 2023, putting it at the state that it is today. The Tax Credit begins slowly phasing out this year.  The Impact Since the implementation of the Solar ITC, the solar industry has grown by more than 10,000%, flourishing into an industry that is now healthy and sustainable. By keeping costs down for the consumer by providing a financial incentive to go solar, the Federal government has allowed solar installation businesses to and drive down the costs of installing solar to the point of sustainability.  The impressive results of the impact of the Solar ITC can be clearly seen in the numbers. A 10,000% increase in solar capacity, a quarter of a million new jobs, and $140 billion in investment have all been recorded. What’s not recorded is the massive positive impact on the environment, the massive savings homeowners have seen on their electric bills, and the quality of jobs created by the flourishing solar industry.How the Solar Tax Credit Works The way the Federal Solar Tax Credit works is that homeowners or business owners who install solar receive a federal income tax credit worth a certain percentage of the cost of their solar installation. They have to own the solar system, which means that they have to either buy it with cash or finance it. It cannot be a leased system.  What this does is bring down the total cost of the solar installation, which makes it within reach of a much larger percentage of the population. This has proven to be a successful model, based on the results of its implementation over the last 12 years. So let’s look at an example of how this would work with an average sized solar system. Let’s look at a $20,000 dollar system.  Since its original implementation, the Solar Tax Credit has been at 30%. So what we do is multiply that percentage by the total cost of the installation ($20,000) $20,000 X 30% = $6,000 So that $6,000 is what the home or business owners would receive as an income tax credit. So if the homeowner owes $12,000 on their federal income taxes, that amount would be reduced to $6,000.  That takes the full price of the system down to: $20,000 - $6,000 = $14,000 So the final cost would be $14,000 with the Tax Credit included. If the home or business owner doesn’t owe that much on their taxes, the credit can be rolled over to following years. So even if what you owe isn’t that much every year, the tax credit could reduce what you owe for years to come. This formula has been the driver for solar’s success. This massive Tax Credit has served as an extremely effective incentive as it has stood so far. Now, in 2020, the Tax Credit is scheduled to reduce, but not by much. What is the Solar Tax Credit for 2020? In 2020, the Federal Solar Tax Credit is scheduled to reduce to 26%, down 4% from previous years. This has been planned since the extension in 2015, so homeowners have known it was coming for years. The Tax Credit is scheduled to continue to decrease over the next two years, down to 22% in 2021, then down to 0% by 2022 for residential installations, leaving a 10% credit for commercial installations only. So for the next two years, there’s still substantial savings to be gained by installing solar. So let’s do that same math in the example earlier, but with the 2020 26% Tax Credit instead of the full 30%. So that same $20,000 system will now be reduced by 26%. $20,000 X 26% = $5,200 So instead of a $6,000 Tax Credit, you will receive a $5,200 Tax Credit.  $20,000 - $5,200 = $14,800  That makes the total price of installation $14,800. So only $800 more than the total price with the 30% Tax Credit. While that $800 is 4% of the total, it’s still not a huge loss, especially compared to the $5,200 you can get off with the credit. So if you’ve been deterred from going solar because the Solar Tax Credit has decreased, you may want to rethink your decision. The truth is, the Solar Tax Credit is still very substantial, and will be for two more years. If you let the slight decrease completely deter you from going solar, you will be missing out on huge savings.Why Now is the Best Time to Go Solar Besides the still substantial 26% Solar Tax Credit there are several other reasons that right now is the best time to go solar. What we mean by “the best time” is that, by going solar as soon as possible, you will get the best deal and save the most money. So let’s look at the other reasons why right now is the best time to go solar. Lowest Costs Ever As a result of the amazing work the Solar Tax Credit has done, the actual cost to install solar, even without the Tax Credit, is lower than it has ever been, due purely to the volume of installations the the industry has reached. These combined low costs, combined with the Tax Credit, make solar much cheaper than it was in previous years. Sure, they will likely keep going down, but you may as well take advantage now while the Tax Credit is still substantial.  Electricity Prices will Continue to Go Up It is inevitable that the prices that the utility charges for power will continue to go up. In SDG&E for example, is looking for a 4.5% increase this year. That means that the sooner you go solar, the more you will save, as you will not have to pay for power when those rates go up.  Interest Rates are Very Low Many homeowners who go solar choose to finance their systems, which is a great option because they can make monthly payments that are less than their power bill was before going solar. It just so happens that right now, because interest rates happen to be lower than they’ve been in years, is one of the best times to finance solar. If you go solar now you can lock in those low rates, which will save you a ton of money in the long run. So as you can see, the Solar Tax Credit is still around, and at 26%, it is still very substantial. So homeowners who are deterred from going solar because they think the best deal has passed should know that the 4% difference is not much. The Tax Credit combined with lowering costs, low interest rates, and increasing electricity rates makes it so that there will never be a better time to go solar than now.

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