How the Solar Investment Tax Credit (“Solar ITC”) Works for Homeowners and Businesses

Solar Investment Tax Credit

If you are a homeowner or business executive who is considering a solar power system so that you can help the environment and reduce your year-to-year utility bills, then the Solar Investment Tax Credit (Solar ITC) could significantly reduce your installation costs.

What is the Solar ITC?

Solar Powered Roofing

The Solar ITC program was enacted by the U.S. Congress in 2005 as part of the Energy Policy Act. Originally scheduled to last for a year, the popular program was renewed for two years in 2006, renewed for eight years in 2008, and renewed for five years in 2015.

How the Solar ITC Program Works 

The Solar ITC program is a dollar-for-dollar reduction in the U.S. federal tax income amount that is owed by an individual or jointly-filing couple (for a residential solar system), or by a business (for a commercial solar system).

How Much is the Solar ITC Program Worth?

cost of installing a solar power system

Until 2020, homeowners and businesses could save 30 percent of the cost of installing a solar power system as part of a residential or commercial renovation (e.g. enhanced corporate office or dental office design, etc.). To be eligible for the 30% reduction, construction must start in 2019, and the project must finish and be put in service by the end of the fourth calendar year after construction began.

Scheduled Reductions 

The Solar ITC for both homeowners and businesses will fall to 26% in 2020, and then to 22% in 2021. In 2022, the program will no longer be offered to homeowners, and the rate for commercial solar systems will permanently drop to 10%.


Solar Investment Tax Credit

To qualify for the Solar ITC in any given year, homeowners and businesses must meet one of two conditions.

The first condition is called the “Physical Work Test”, and means that a significant amount of work must take place in the year in which the project is deemed to have begun. For example, a homeowner who intends to declare that construction for their residential solar power system started in 2019, must also prove that substantial work took place that year. Simply having conversations with potential vendors or even signing a contract is not sufficient.

The second condition is called the Safe Harbor Test, and means that at least 5 percent of the total cost of construction was incurred in the year in which the project is deemed to have begun. For example, a homeowner that wants to declare that construction started in 2019, yet does not meet the Physical Work Test as described above, may still do so if they pay at least 5 percent of the total cost in 2019.

Meeting Both Conditions

If a homeowner or business meets both conditions (Physical Work Test and Safe Harbor), then the condition that was met first will be deemed to be effective. For example, if a homeowner incurs 5 percent of the total cost of a solar power system in 2019, and substantial work on the project starts in 2020, then the official start date of the project will be 2019. This is a particularly important element of the Solar ITC program, because as noted above, the incentive will begin falling in 2020 (and will be eliminated entirely for homeowners by the end of 2021). As such, homeowners and businesses that want to take advantage of the maximum 30% reduction in 2019, yet do not have enough time to start doing work before 2020, can still qualify by paying 5 percent of the total cost in 2019.

The Bottom Line 

While some government tax rebate programs are convoluted — or just plain ineffective — the Solar ITC has been proven to be highly successful and quite lucrative. For example, the cost of a residential solar power system can be anywhere from around $15,000 to $25,000 (and in some cases higher). Saving 30 percent is welcome news, on top of the ongoing utility bill savings — and of course, helping make the environment greener and cleaner. Everybody wins!

Article Submitted By Community Writer

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