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Those people considering the installation of a solar energy system on their home or business may want to get busy and have the system installed now. Federal tax incentives are decreasing and, for residential purposes, going away completely.

Federal solar tax credits, known as ITC, or Investment Tax Credits, have helped to increase the annual growth of solar energy systems by 52 percent since ITC was enacted as part of the Energy Policy Act of 2005. But 2020 saw a reduction in the size of the credit from 30 percent to 26 percent. Next year, they’ll drop to 22 percent.

The Energy Policy Act was set to expire at the end of 2007 but was extended multiple times. No such extension has occurred yet and, after falling to 22 percent in 2021, they’ll fall to 10 percent for commercial solar energy systems after that and are set to expire for residential projects after 2021.

While ITC has helped to promote the installation of solar energy systems, the program has also saved homeowners and businesses a lot of money over that period of time.

The program works by allowing a homeowner or commercial entity to claim a tax credit on their federal taxes based on the cost of installing a solar energy system. If, for instance, using the following example, the solar tax credits work this way:

  • $20,000 – cost of installing a solar energy system on the roof of a home in McHenry County
  • $5,200 – eligible tax credit based on ITC
  • $4,500 – homeowner’s tax liability for 2020 tax year
  • $700 – unused portion of tax credit, which the homeowner can roll over to the next tax year

After the 2020 tax year, however, those numbers will change. Instead of a $5,200 tax credit, the homeowner would only be eligible for a $4,400 tax credit. In 2022 and beyond, a commercial installation will allow for a $2,000 tax credit. A residential installation will provide no tax credit at all.

To be eligible for this year’s 26-percent tax credit, construction of the solar energy system must begin this year.

For those who are leasing their solar energy system, or have a PPA (Power Purchase Agreement), they are not eligible for the tax credits at all. Only the owner of the system can use the credits. This is generally true for state and local solar energy incentives, too.