25 Reasons for 25D Direct Pay: Why Solar Tax Incentives Should Benefit More Americans

Update 11/2/2021: Congress released a revised version of the Build Back Better Act on October 28, which includes refundability for the Section 25D tax credit. If the bill is passed, all taxpayers would be able to receive the full tax credit — if the value of credit exceeds the amount of taxes owed, the household would receive the difference as a tax refund, or payment, after filing taxes. This would put solar into reach financially for many more American families.

However, households will likely have to wait to file annual income taxes to access the refundable solar tax credit, unlike a direct pay option which could potentially provide a payment at the time the taxpayer installs solar. (For example, the current Child Tax Credit is a refundable tax credit with advance monthly payments, while the Earned Income Tax Credit is a refundable credit that households can only receive at tax time.)  As a result, households that can’t pay the upfront costs of solar or access financing may not be able to benefit from the refundable tax credit as much as a direct pay option.

To encourage Americans to install more solar, the federal government provides a tax break to households that put solar systems on their roofs. This tax break, known as the Section 25D residential solar Investment Tax Credit, is the cornerstone of national public policy for rooftop solar.

Unfortunately, many Americans — especially low-income households — aren’t able to take full advantage of the residential solar Investment Tax Credit. Since the solar tax credit can only offset taxes owed and any excess amount can’t be refunded as a payment to the taxpayer, only households that owe enough in taxes receive the full value of the tax break. Households that owe fewer or no federal taxes aren’t able to benefit fully from the financial incentive, as wealthier and higher-income households can, keeping solar out of reach for many.

To fix this, the 30 Million Solar Homes initiative, the Residential Renewables for All coalition, and other advocates are pushing for a direct pay option for the residential solar tax credit to be included in the infrastructure legislation Congress is currently debating. (ILSR supports both groups.) This would make solar tax incentives more equitable by allowing households to receive the full value of the credit as a single, direct payment instead of only reducing taxes owed, bringing the benefits of solar energy to more Americans.

Here are 25 reasons why Congress should make solar tax incentives more equitable by creating a direct pay option for Section 25D residential solar tax credits:

1. The solar Investment Tax Credit is one of the most impactful federal solar policies. Since it was first offered in 2006, solar deployment has expanded by more than 10,000 percent. Despite it being the main federal solar incentive, many American households still can’t take full advantage of the solar Investment Tax Credit.
2. A direct pay option would help millions of households with moderate, low, or no tax liability benefit fully from the solar Investment Tax Credit. According to estimates from RMI, around seven in ten households can’t use the full value of the tax credit and four in ten households can’t benefit at all from the credit, based on their average tax liability.
3. The Biden Administration has committed to an equitable transition to clean energy. As part of the Justice40 Initiative, the administration has pledged to direct 40 percent of the benefits of certain federal investments to disadvantaged communities. This commitment to equity should extend to tax incentives, like the solar Investment Tax Credit.
4. More equitable tax incentives would help Americans of all incomes and colors benefit from solar energy. The current federal tax incentive for solar disproportionately benefits those with higher tax liabilities, such as wealthy households (which are more likely to be white, as a result of racial wealth gaps). A direct pay option for the solar Investment Tax Credit under Section 25D would enable more low- and moderate-income and low-wealth households to enjoy the benefits of solar energy too.
5. Making the solar Investment Tax Credit more accessible could reduce existing disparities in solar adoption. Data from Lawrence Berkeley National Laboratory shows that solar adopters tend to have higher incomes and live in communities with greater white and Asian populations.
6. Failure to make the residential solar tax credit more equitable increases wealth disparities. According to a recent paper from the RAND Corporation, the current tax incentive structure, which primarily benefits the top 50 percent of income earners, “directly contributes to the widening wealth gap in the United States.”
7. A direct pay option gives households the full benefit of the solar tax credit in the first year. Even households that owe enough federal taxes to use the full value of the credit may need to spread it out over multiple years. A direct pay option for the solar Investment Tax Credit would let households receive the entire incentive in a single year, making it more financially feasible to invest in solar.
8. More accessible tax incentives would increase solar adoption. Providing a direct pay option for Section 25D of the solar Investment Tax Credit would make investments in solar energy more affordable for a greater number of households, growing rooftop solar.
9. Extending the Section 25D solar tax credit and creating a direct pay option could result in more than 20 gigawatts of rooftop solar deployment over five years. According to the analysis we conducted as part of the National Impact of 30 Million Solar Homes, it could also create more than $4 billion in electric bill savings and create over 300,000 jobs.
10. Rooftop solar creates local jobs. Compared to utility scale solar, rooftop solar creates more jobs. Enabling more people to install solar on their homes would help support jobs and local businesses in communities across the country.
11. Residential solar can help reduce harmful climate pollution. Household energy use and related decisions result in 42 percent of all energy-related carbon emissions. Rooftop solar helps address this source of emissions.
12. Expanding rooftop solar allows us to rapidly respond to the climate crisis. Rooftop solar can be installed quickly, making it an immediate tool in the fight against the worst effects of climate change.
13. Rooftop solar can also help reduce other forms of air pollution that harm human health. Generating more of our electricity from solar panels on homes instead of from burning coal and fossil gas would reduce air pollution from power plants. People of color and low-income households continue to face disproportionately high exposure to air pollution, including particulate matter.
14. The negative effects of climate change and extreme weather will disproportionately affect low-income households and people of color. Analysis from the Environmental Protection Agency found that these groups face higher risks as a result of climate change across different impact categories including extreme temperature and sea level rise. Those facing the worst impacts of climate change caused by dirty energy should have access to the benefits of clean energy.
15. Local solar, when paired with storage, makes our energy systems more resilient. Rooftop solar and battery storage gives households access to energy during outages and can help stabilize the electrical grid during periods of high demand. The federal government should promote these benefits by expanding access to tax incentives for solar and storage.
16. Rooftop solar saves families money on their electricity bills. Increasing rooftop solar adoption would generate savings that households could put towards food, education, healthcare, and other necessary expenses.
17. Expanding rooftop solar builds wealth. Enabling more households to install solar energy on their rooftops through a more equitable solar tax credit can also raise home values.
18. The economic benefits of solar energy are particularly valuable for many of the same households that are unable to use the full value of the solar Investment Tax Credit. Low-income, Black, Native American, and Latino households tend to have higher energy burdens, which could be reduced through rooftop solar energy.
19. Direct pay for residential solar installations puts households on more equal footing with corporations. Draft versions of the Build Back Better bill released in September included a direct pay option for commercial solar installations under Section 48 of the Investment Tax Credit but it did not extend the option to households that install solar on their homes.
20. A direct pay option makes solar more affordable for households in states that don’t allow third party financing or ownership. Homeowners who can’t afford the upfront costs of solar installation or can’t access the solar tax credit often work with an outside company that will purchase the rooftop solar system and sell power back to the homeowner, but this approach isn’t allowed in all states. A direct pay option for the residential solar tax credit could help lower upfront costs for households that aren’t able to access alternatives like third party ownership, putting solar within reach for more Americans.
21. Increasing local solar deployment, including rooftop panels, is the most cost-effective way to reach clean electricity goals. A report from Local Solar for All, found that the United States should deploy at least 100 gigawatts of rooftop and community solar over the next decade to achieve the Biden Administration’s climate goals (80 percent clean electricity by 2030, 100 percent by 2050) at the lowest cost.
22. Introducing solar into many different communities across the country encourages greater adoption through peer effects. Building new rooftop solar in neighborhoods with low or no solar deployment can increase solar uptake by other households.
23. Half of all U.S. homeowners say they are considering installing or have installed solar panels on their house. According to the Pew Research Center survey, 96 percent of those homeowners say that their reason is to save on utility bills. This suggests that making solar energy installation more affordable though a direct pay tax credit could increase solar adoption.
24. Twenty five U.S. Senators have endorsed a direct pay option for residential solar tax credits. In their letter, the Senators stated, “We believe that a direct pay option will not only help us meet President Biden’s goal of a 50 percent reduction of greenhouse gas emissions over 2005 levels by 2030, but it will also help address long-standing impacts of climate injustice.”
25. More than 350 organizations support direct pay for Section 25D solar tax credits. As part of the Residential Renewables for All coalition, these groups represent environmental justice advocates, renewable energy businesses, and other organizations, including the NAACP, the National Wildlife Federation, and Black Owners of Solar Services.