Solar Investment Tax Credit Basics

 

• The solar investment tax credit (ITC) is a tax credit that can be claimed on federal corporate income taxes for 30% of the cost of a solar photovoltaic (PV) system that is placed in service during the tax year.
  
• A solar PV system must be placed into service before December 31, 2016, to claim the 30% ITC—the tax credit will decrease to 10% starting in 2017.
  

• For solar PV systems installed on or after October 4, 2008, there is no maximum amount that can be claimed through the ITC, and it may be used to offset either income taxes or alternative minimum taxes.
  
• ITC + Depreciation:  Typically, a solar PV system eligible for the ITC can also use an accelerated depreciation corporate deduction.
  
• How is the ITC Calculated? The ITC is calculated by multiplying 30% by the “tax basis,” which is the amount invested in eligible property. Eligible property includes the following expenses related to a solar PV system:  Solar PV panels, solar curtain walls, and sales and use taxes on the equipment, installation costs and racking, inverters, transformers, circuit breakers, energy storage devices and transfer equipment.
  
• Accelerated Depreciation: A taxpayer that claims the commercial ITC for a solar PV system placed in service can typically also take advantage of accelerated depreciation (aka the Modified Accelerated Cost-Recovery System, or MACRS) to reduce overall cost of a PV installation. To calculate income on which federal corporate taxes are owed, a business takes the difference between its revenues and expenses, plus or minus any adjustments to income. Because depreciation is considered an expense, having a larger amount to depreciate during the tax year results in a smaller overall tax liability. Note, whereas the ITC is a tax credit—a dollar-for-dollar reduction in taxes owed—depreciation is a deduction, meaning it only reduces a business’s taxes by the depreciation amount multiplied by the business’s tax rate.