To increase solar energy, the federal government has given out a tax break since 2006 called the solar Investment Tax Credit. Under the solar tax credit, households and businesses that pay to install solar panels get part of their money back in the form of a tax break. That percentage they get back has changed over the years, but for solar panels built in 2022, the tax credit is worth 26 percent of the installation cost.
Currently, the tax credit just lets people and businesses that install solar reduce the taxes that they owe to the federal government — if the credit is worth more than taxes owed over a certain time period, they don’t get the full dollar amount. This makes it harder to go solar for many families, schools, and other nonprofit organizations that owe few or no taxes. Right now, 7 in 10 Americans can’t receive the full value of the tax break if they go solar, according to calculations by RMI.
We can make the solar Investment Tax Credit fairer by changing it to a:
Refundable Tax Credit ← Good Choice
- If the solar tax credit is worth more than the taxes owed, people and businesses that installed solar get the extra amount in the form of a refund payment at tax time.
- Taxpayers can receive the full value of the credit in the first year.
- Helps the 7 in 10 households that currently can’t use the full value of the tax credit because they owe too little in taxes and the 4 in 10 households that can’t benefit at all from the current credit because they owe no taxes.
Direct Pay Tax Credit ← Best Choice
- People and businesses that install solar can file for a direct payment of the value of the credit at the time of installation. They do not need to wait until filing taxes to get the payment.
- Taxpayers can receive the full value of the credit immediately.
- Helps schools, nonprofits, and other organizations with no tax liability use the solar tax credit without needing a tax equity partner. Also helps taxpayers who can’t afford to wait until tax filing time to get the value of the credit.
For a deeper dive on the implications of a refundable or direct pay tax credit for solar on public buildings, churches, and other non-taxable entities, check out this piece from ILSR.
The good news is that pending federal legislation may address this problem. Refundability for the solar tax credit for households (under Section 25D of the U.S. tax code) is included in the draft of the Build Back Better Act passed by the U.S. House of Representatives. A direct pay option for solar tax credits for commercial installations (under Section 48) is also included in the stalled Build Back Better Act. In addition, the draft law would make the solar tax credit available for an additional ten years. Together, these provisions of the Build Back Better Act would help millions of American families and many nonprofits, cities, and other non-taxable entities go solar!
Learn more about the 25 reasons why Congress should create a direct pay option for the Section 25D solar tax credit for households.