Renewable Energy Tax Credits in 2021 and Beyond
In 2021, renewable energy tax credits are available in the United States to help taxpayers reduce the total cost of a clean power system. Applied against a person or business’s federal and state tax liability, credits for renewable energy systems are available both at the national and local levels to reward sustainability-conscious consumers.
Solar Us Shop is a digital retailer focused on providing our customers with the best possible renewable energy products, news, and information. In this quick guide, we will outline all of the most important renewable energy tax credits to know about this year when considering an investment in green power.
The Federal Investment Tax Credit (ITC)
The federal investment tax credit (ITC) is a purchasing incentive available to American taxpayers for their investment in renewable, sustainable, and clean energy systems. Applying nationwide to many different technologies, the ITC has helped accelerate the growth of renewable energy development in the residential, commercial, and industrial sectors.
Below, we will answer some of the most commonly asked questions about the federal investment tax credit. For more information, you can download an up-to-date factsheet about the federal ITC from the US Office of Energy Efficiency and Renewable Energy.
What qualifies for federal renewable energy investment tax credits?
In 2021, investments in the following technologies can qualify for the federal ITC:
- Solar photovoltaic (PV) systems
- Solar thermal energy systems (such as water heaters)
- Geothermal systems
- Fuel cells
- Small-scale wind generators
- Combined heat/power systems
- Solar fiber optic lighting
- And more
By far, the most commonly used application of the federal investment tax credit is for residential and commercial solar panel systems. Therefore, it is very common to see the ITC referred to as the “solar investment tax credit” or simply “the solar tax credit.”
How much is the investment tax credit?
Critically, it is important to understand that the investment tax credit can usually be applied to the total cost of renewable energy. In addition to the panels and equipment themselves, the ITC can also be applied to qualifying labor, transportation, and other costly aspects of the installation.
In the image above, you can see all of the important dollar amounts to consider when calculating the worth of an investment tax credit. On the installation's total cost of $16,000 (after a $2,000 deduction at the city level), the 30% tax credit was applied to deduct an additional $4,800 from the final true cost of the system.
While the federal ITC was previously set at 30% of total system cost, in 2021, home and building owners alike can receive up to 26% off of the total cost of a renewable system against their federal income tax liability. Although this is set to reduce to 22% soon, the current US administration is proposing an extension of up to 10 years for the federal ITC to remain available.
Who can claim the solar tax credit?
The solar tax credit can be claimed by both tax-paying individuals and businesses. Tax-exempt organizations and homeowners are not eligible to claim the solar tax credit, as it is applied directly to the income tax of the system owner.
To completely qualify for the solar (or other renewable energy) tax credit, the following must be true:
- Home and property must be owned by the taxpayers (no renters)
- Solar panels or other equipment must be owned as well (no system leases)
- The filer must have a federal tax liability greater than the total ITC amount.
Essentially, to claim the full solar tax credit, both the solar energy system and the property on which it is installed must belong to the same individual or organization. While rentals and leases are a great way to quickly adopt renewable energy, individuals that do not own their energy system will not be able to claim the solar tax credit.
How do you claim the investment tax credit?
To claim the federal solar ITC, the appropriate forms must be completed for the year in which the installation was completed. Currently, IRS form 3468 is the official document that must be filed alongside your individual tax return (Form 1040) to claim the federal ITC.
To claim your actual credit, find the total amount of your renewable energy property improvement and indicate it within the corresponding box on the form. Below this line, there will be instructions on the appropriate percentage of the total amount to apply to find the dollar amount that can be claimed on your individual income tax return.
How many times can I claim the solar tax credit?
For homeowners, you can only claim the solar tax credit once for an installation on your home. However, if you move or own another home or property, you may be eligible to claim the solar tax credit more than once for separate, distributed energy systems.
Renewable Electricity Production Tax Credit (PTC)
If you plan to sell the electricity that your renewable energy system produces, then it is also possible to take advantage of the renewable electricity production tax credit (PTC). The federal PTC is claimed by IRS Form 8835 and can only be utilized by qualified facilities generating electricity from qualified renewable energy sources.
Although the PTC is ever-changing, electricity suppliers may be able to claim as much as 2.5 cents per kWh produced by solar, geothermal, hydroelectric, wind, biomass, or other renewable energy sources.
PTCs vs Renewable Energy Credits (RECs)
Although they are not a true “tax” credit, Renewable Energy Credits (often referred to as RECs) are one of the most popular incentives for installing a renewable energy system.
Instead of being applied to year-end taxes, renewable energy credits are real, non-tangible commodities that are created by green energy generators and applied to an individual or entities’ electricity costs or carbon emissions.
Modified Accelerated Cost-Recovery System (MACRS)
For small businesses, it is also possible to claim the modified accelerated cost recovery system (MACRS) to the investment costs of a renewable energy system. Claimed as a tax deduction, MACRS has been helping businesses recoup solar, renewable energy, and other property investments since 1986.
Currently, organizations are permitted to make annual deductions from the cost of their system within payback periods of 5 years. Accelerated depreciation can be applied to a wide variety of renewable energy system components including generators and storage for wind, solar, fuel cells, geothermal energies, and more.
In the 2020s, we have entered a crucial period for the acceleration of green energy development as world power demand is increasing alongside adverse effects from climate change. In the United States, we are fortunate enough to have tax credits available in place for rewarding renewable energy generation on both small and large scales.
Looking forward, we are hopeful that the current administration will be successful in extending the tax credits further into the future for more home and property owners to take advantage of. To keep up to date, feel free to read more about renewable energy news, products, and more in our sustainability blog.