The Investment Tax Credit (ITC)
Renewable energy tax policies play a vital role in creating new high-wage American jobs, spurring economic growth, ensuring U.S. global competitiveness, lowering energy bills for consumers and businesses, and reducing pollution. The investment tax credit (ITC) is a reduction in the overall tax liability for individuals or businesses that make investments in solar energy generation technology. The ITC provides critical policy certainty to the private sector to catalyze private investment in manufacturing and solar project construction and ensure the growth of solar industry in the United States.
The ITC functions as a 30 percent uncapped tax credit for residential solar systems under Section 25D and commercial solar systems under Section 48 of the Internal Revenue Code. The Investment Tax Credit is in effect through December 31, 2016.
Click here for a background memo on the ITC.
History
The Energy Policy Act of 2005 (P.L. 109-58) created tax incentives for solar energy - a new 30% investment tax credit (ITC) for commercial and residential solar energy systems that applied from January 1, 2006 through December 31, 2007. These credits were extended for one additional year in December 2006 by the Tax Relief and Health Care Act of 2006 (P.L. 109-432). In 2007, global investment in clean energy topped $100 billion, with solar energy as the leading clean energy technology for venture capital and private equity investment. The solar tax credits helped to create unprecedented growth in the U.S. solar industry from 2006-2007. The amount of solar electric capacity installed in 2007 was double that installed in 2006.
In response to the dramatic downturn in the economy in 2008, Congress enacted the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Among other provisions, the legislation included an eight-year extension of the commercial and residential solar ITC. It also removed a $2,000 monetary cap on the total credit that could be claimed by a homeowner installing a rooftop residential solar electric system. The bill also permitted utilities and companies paying the alternative minimum tax (AMT) to qualify for the credit. In 2009, under the American Recovery and Reinvestment Act, the $2,000 credit cap on solar hot water installations was eliminated.
Depreciation of Solar Energy Property
Along with the Section 48 investment tax credit, solar property also qualifies for various depreciation provisions in the U.S. Tax Code:
Accelerated Depreciation and 100 Percent Expensing
Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which allows the owner of qualifying equipment including qualifying solar equipment to deduct 85 percent of their tax basis using either the commercial ITC or the Treasury Grant Program. This form of depreciation can be claimed over a five year period.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included provisions that allow companies to elect a 100 percent depreciation of eligible property through 2011 and a 50 percent bonus depreciation through 2012. The 100 percent expensing is a way for companies with qualified, new projects to depreciate 100 percent of the capital investments placed in service after September 8, 2010 through December 31, 2011. For companies that place equipment in service after 2011, the bill contains a 50 percent bonus depreciation provision that companies can elect for qualifying property through December 31, 2012.
