Solar PV tax incentives are a powerful financial incentive for homeowners, farmers, and business owners considering going solar. Unfortunately, renewable energy tax credits are not refundable, and so not a fair incentive for those with limited tax liability, or for non-taxable entities. If you DO have tax liability, however, we recommend you act now, because the tax credits begin declining in value in 2020.
First, we’ll outline the basics, then below, we’ll provide links and brief notes for the federal and state solar tax incentives. Please talk to your tax professional for more information.
The federal investment tax credit is 30% for residential and commercial systems.
Residential systems must be “placed in service”, and commercial systems must have “commenced construction” (more on what this means below), by December 31st, 2019. The federal credit drops to 26% for 2020 projects, 22% for 2021 projects, and 10% thereafter (for commercial, 0% for residential). Commercial projects (farm, business, and third-party owned “PPA”) are also eligible for 100% “bonus” (first year) depreciation.
The Iowa solar tax credit is defined as 50% of the value of the federal credit.
This includes residential and commercial solar PV systems and offers up to $5,000/project for residential and up to $20,000 for commercial. But … there is an annual cap, and a waiting list – read below for details.
Farms and businesses with tax liability can install solar PV systems in 2019 (or at least “commence construction” – more on this loophole below) and write down 65-75% (30% federal credit + 15% Iowa credit + depreciation) or more of the total costs on their taxes, resulting in simple paybacks of often 4-6 years.
Homeowners with tax liability can install solar PV systems in 2019 and write down 45% (30% federal credit + 15% Iowa credit) of the cost, resulting in simple paybacks of often 7-9 years. The warrantied life of the systems is generally 25 years.
Federal Tax Incentives
A good overview of the solar investment tax credit (ITC) is provided by the Solar Energy Industries Association here. The key point to reiterate is that the full 30% level is available through 2019, and then begins to ratchet down … except for the “safe harbor” loophole, which we discuss below.
The commercial ITC is further explained on the Department of Energy’s web site and in this fact sheet from the Solar Outreach (public-private) Partnership. NOTE, however, that fact sheet is not current in its discussion of the bonus depreciation available to businesses, which is currently 100% and well explained by the SEIA here, and on this IRS newsroom update.
The residential ITC is further explained on this Department of Energy web site, and in this fact sheet from the Solar Outreach Partnership. Note, there is no depreciation or “safe harbor” benefit for residential projects, as there is with commercial projects, unless the system is owned by a third party under “PPA” arrangement, which is not common for residential systems in Iowa.
What is the “safe harbor” option? Residential and commercial solar ITCs fall under different sections of the federal tax code. A key distinction is that residential systems must be “placed in service” in the year for which the credit is claimed, while the commercial systems must only have “commenced construction”. Because large projects can take a long time to build, and the credit is meant to spur investment, the IRS determined that commercial project developers are eligible for the credit the year they “commence” construction, and have up to four years to complete the project as long as they make “continuous progress” towards completion. Read the details at the SEIA summary, or straight from the IRS guidance.
NOTE, the federal solar ITC also can cover battery storage systems, when installed with the purpose of storing energy produced by the solar energy system. See this fact sheet from the National Renewable Energy Lab, and this discussion from EnergySage.
State Tax Incentives
As of March 2019, the Iowa solar tax incentives for home and business are still in effect, though with a waiting list. They are defined as 50% of the federal credit a project is eligible for, up to $5,000 for residential systems, and $20,000 for commercial systems.
The Iowa Department of Revenue entry page for the credits is here. From that page, you can click through to the page with more information here.
A very important point to note with the Iowa credit is that you must first submit an application for the credit award to IDR by May 1 of the year following installation. Without this award “pre-approval”, you will not be able to claim the credit on your Iowa tax return, and could lose the value. This process is described in the links above.
Another important (and frustrating) point is that the Iowa solar credit is capped at $5 million/year. Installations and applications in recent years have exceeded this amount, which means a waiting list is built up, and you may not be able to utilize the Iowa credit the year following installation.
A final point is that the application for the Iowa credit for both residential and commercial systems cannot be made until the system is “placed in service”. So commercial systems that may apply for the federal credit immediately based on the “commence construction” and “safe harbor” rules (described in the federal section above) cannot apply for the Iowa credit until the project is completed and “placed in service”.