U.S. Congress extends ITC for 2 years. Is it the best we could bargain for?

The Solar Investment Tax Credit (ITC) was introduced in the USA by the Energy Policy Act of 2005. Back then, Congress proposed a solar panel tax credit worth 30% of the total solar installation cost (parts and labor) – a dollar-for-dollar reduction in the amount of income tax owed by the homeowner. For example, if the solar PV system cost $15,000, you could claim a $4,500 federal tax credit, which would reduce your federal income taxes due by $4,500 respectively.

Thanks to its popularity and significant contribution to renewable energy development, the ITC has been extended multiple times since it was enacted in 2006. In 2020, however, it started fading away: the credit value was reduced from 30% to 26% and was going to fall even lower. Nearly 1,000 solar energy companies sent a letter to Congress, urging it to extend the Federal Tax Credit program for solar energy projects. Coronavirus pandemic, Biden's victory or the Great conjunction – no matter what exactly made it possible, but the stimulus bill has been passed and the ITC has been extended for 2 years.

The two-year extension of the Solar Investment Tax Credit will retain the current 26% credit for solar projects that begin construction until the end of 2022. For projects launched in 2023, the ITC will fall to a 22% rate. In 2024, it will end for residential solar projects and drop to 10% for commercial installations.

There is still no maximum amount that can be claimed, so don't worry if your tax liability is lower than your solar rebate – the credit can rollover to the next year. For example, if your solar system costs $20,000, you are eligible for $5,200 (26% of the total gross cost) in tax credit. If your annual tax liability is $4,000, you won't pay any taxes in 2021 and will owe $1,200 less in 2022 ($2,800). If your tax liability is $6,000, you will get a full credit the same year and will owe just $800.

The Solar Investment Tax Credit is claimed when you file your yearly federal tax return. All you need to do is to complete a relevant IRS form and add your energy credit information to Schedule 3 (Form 1040).

No doubt, the extension was a necessary step in the context of the coronavirus pandemic. It will provide significant upside to solar growth, as more projects will be able to secure the 26 percent credit. Large-scale solar projects can still benefit from 'safe-harbor' provisions, which allow preserving the tax credit of the current year by either incurring at least 5% of total project price, or beginning physical work of a significant nature on a project.

To support smaller solar projects, renewable energy groups insisted on including a 'direct pay' provision as well. It would allow tax credits to be converted into direct payments from the federal government, rather than needing to be claimed by homeowners seeking to offset tax liability. The thing is that the pandemic's impact on the economy might reduce demand for tax equity investments, since banks and financial institutions will have less appetite for credits to offset tax liabilities in a year when profits were depressed. Unfortunately, that provision didn't make it to the final bill.

Well, as the head of solar research for Wood Mackenzie Ravi Manghani optimistically put it, 'all in all, the industry will reflect on this outcome as a glass three-quarters full'.