Since 2006, the market for solar has been driven by government subsidies, most significantly by the solar Investment Tax Credit (ITC). The ITC is a 30% tax credit for solar systems on residential and commercial properties – the credit can be applied to personal income taxes. Since the ITC's enactment, the solar industry has grown by over 10,000%, hundreds of thousands of jobs have been created, and billions of dollars have been invested in the U.S. economy in the process. In 2015, the ITC was extended for a few additional years under the basis that it provides critical stability for businesses and investors.
The pressing issue now is that starting in 2020, the ITC is supposed to follow a step-down schedule. The ITC is currently a 30% credit, but will reduce to 26% for projects beginning construction in 2020, 22% for those in 2021, and then down to 0% for residential projects and 10% for commercial projects permanently after 2021.
Policymakers and renewable energy advocates alike have been wrapped in debate over how the reduced ITC will affect the economic feasibility of solar energy. Some advocate to extend the ITC, while others believe the solar market is strong enough to stand on its own without subsidization.
However, on July 19, the IRS released new guidance on which solar constructions qualify for the ITC. Under the new guidance, Notice 2018-59, there are now two ways to determine the “commence-construction date: 1) starting physical work of a significant nature or 2) meeting the 5 percent safe harbor test by incurring 5 percent or more of the total cost of the facility in the year that construction begins.”
While the old rule made it so that the 30% ITC would only be effective for projects starting in 2019, now projects may qualify for the full 30% ITC as long as the project is started in 2019 and then placed into service before 2024. Further, projects starting in 2020 will receive the 26% ITC for three years, and 2021 projects will receive a 21% ITC for two years.
This elongated step-down period allows a larger ITC to take effect for more years than the original step-down schedule. This new guidance seems to be a pretty fair compromise between those who advocated for fully extending the ITC for a few more years and those who felt the solar market should stand without subsidies.
Imaged sourced from: Wikimedia Commons