Solar Tax Credit – The truth about the Investment Tax Credit

Florida Solar One Explains the ITC

FOR IMMEDIATE RELEASE – Key West, FL, August 2019. Florida Solar One, South Florida’s premier solar panel installation company, explains in detail the investment tax credit. This widely known solar installer gets calls every day from potential solar customers in Broward, Miami-Dade, and Monroe counties asking for clarification on the renewable investment tax credit. The investment tax credit will be explained in detail in this press release, and we urge people read and understand before investing in solar.

To begin with, the investment tax credit is a credit; it is not a deduction or a check from the government. This is not a reduction in the cost of the solar system. When presented with quotes from solar contractors, please keep an eye out for the “incentives to customers” or something alike. It will typically look like this, and these are just examples:

Gross cost of system: $25,000

Incentive to customer (30%): $7,500

Net system cost: $17,500

This is very misleading. For someone who does not understand how this work, it can easily be misconstrued the “incentive” is a cash reduction in the system cost, and your actual expense will be $17,500 (in this example). The contractor is not reducing your system cost by $7,500. Your out-of-pocket cost will be $25,000. The 26% “incentive to customer” is the amount of eligible tax credit the IRS recognizes. The solar panel construction company is not going to generously give you 26% of their profit because they like you. The example’s incentive and net cost are to show maximized tax credit utilization.

As of 2022, the IRS recognizes 26% of the installation cost as a tax credit. Starting 2025, the credit is scheduled to expire completely.  Once done there will be no residential tax credits at all. However, it remains very likely this popular Tax Credit will continue beyond 2025.  If not the system cost will be whatever the contractor proposes and that’s it (unless there are other local incentives not to be confused with tax credits).

Now that we have explained the misleading nature of what some solar contractors present as an incentive, let’s explain the tax credit. A tax credit is a dollar-for-dollar credit given to any outstanding balances due to the IRS. For example, a person owes the IRS $10,000, and they are eligible for $7,500 worth of credits because they went solar. They now owe the IRS $2,500 ($10,000 – $7,500). If you do not owe enough money to the IRS, they still will not be sending you a check for the balance of your tax credit. The credits remain “reserved” or are carried over until they are used any year up to their expiration date.

Here comes the magic question that everyone asks The US Solar Institute: “how long can I carry over the tax credits?” We have heard “you can carry them for two years”. We have heard “you can carry them for five years”. We have even heard “you can carry them up to 15 years”.  Taken straight from the IRS website, “A taxpayer may not carry forward the § 25C credit. Thus, if a taxpayer cannot claim all or a portion of the credit in the year in which the related expenditure is treated as made, the unused amount of the credit will expire. However, a taxpayer may carry the § 25D credit forward to future tax years pursuant to § 25D(c).”