On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA). The bill is broad and touches on many aspects, from corporate tax rates to prescription drug prices, but a significant portion of it is dedicated to addressing climate change. Indeed, if studies cast doubt on the expected impact of the IRA on inflation, what is undeniable is that this bill is the biggest investment in the fight against climate change in the United States history.
One of the pillars of the IRA’s strategy to combat climate change – and the title for people planning a DIY solar project – is the extension and expansion of the Federal Solar Tax Credit (also known as the Solar Investment Tax Credit or Solar ITC).
The Solar ITC allows US taxpayers to claim 30% of the total cost of installing a new residential solar PV system as a credit on their federal income taxes. The installation cost includes the cost of equipment (including shipping), labor and permit fees if you hired for installation, tools purchased or rented if you did a DIY installation, and sales tax on all equipment and labor.
The taxpayer claiming the solar ITC must own the PV system and not rent it. The system itself must be installed in the United States and at the taxpayer’s primary residence or part-time/vacation home to qualify. A system installed in a rental property owned by the taxpayer is not eligible – although it may be eligible for business ICT.
You can read the full text of the Inflation Reduction Act herebut now let’s look at how the Solar Investment Tax Credit was improved by the Inflation Reduction Act.
President Joe Biden signing the Cut Inflation Act on August 16, 2022
Federal Solar Tax Credit Extension
The Solar ITC has been in place since 2006 but was due to expire after 2023 after increase from the initial rate of 30% to 26% in 2021. Now, with the passage of the IRA, the 30% rate has been reinstated and will remain in place until 2034.
The 30% rate is retroactive for all eligible grid-connected and hybrid systems installed ANY time in 2022, and will begin to apply to off-grid (standalone) systems installed after 12/31/2022 (more info on energy storage below).
Extension of the Federal Solar Tax Credit
Prior to the IRA, the solar ITC applied to grid-connected solar PV systems and hybrid solar systems (solar + grid-connected storage battery) whose connected storage equipment totals 3 kWh or more and is charged exclusively by the PV. But the solar ITC did not apply to stand-alone (off-grid) solar power systems.
This is where the news gets really good for off-grid: Solar ITC now extends to stand-alone (off-grid) solar + storage systems installed after 12/31/2022 at the rate of 30%!
The Federal Solar Power and Battery Storage Tax Credit
Things can get a little complicated here, but if we look at the different types of systems and some example scenarios, we can keep it manageable.
Grid-connected PV systems do not have batteries, so eligible systems installed after 12/31/2021 are covered by the CII Solaire at 30%.
Stand-alone (off-grid) photovoltaic systems installed after 12/31/2022 with at least 3kWh of storage capacity will be covered by the Solar ITC at 30%.
Hybrid PV systems (grid tied but also connected to battery storage) installed after 12/31/2022 are covered by the CII Solaire at 30% as long as these additional criteria are met:
- PV and batteries were installed at the same time
- Battery bank storage capacity is at least 3kWh
For grid-tied systems installed before 12/31/2021 to which battery storage was added in 2022, battery storage components are likely to benefit from the 30% rate. The IRS has issued private rulings in 2013 and 2018 allowing some people to apply the Solar ITC to their battery storage facilities coupled (and charged exclusively by) PV – but these private decisions do not constitute extensive legal precedent. If you plan to add batteries to an existing grid-tied solar system before the end of 2022, it is advisable to consult your accountant or tax specialist before planning to claim the tax credit at the new 30% rate.
Other solar incentives to associate with ITC
Claiming the federal solar investment tax credit does not preclude you from claiming any other solar rebates and renewable energy incentives for your system, including national and local utility discounts and net metering agreements.
In addition to broadening and expanding the solar ITC, the IRA has also added incentives for electric vehicles (EVs and PHEVs) – particularly those assembled in North America. US taxpayers can get a $7,500 tax credit for the purchase of a new electric vehicle, if it was assembled in North America. Previously, the $7,500 electric vehicle tax credit was calculated per electric vehicle model, with the incentive amount decreasing as specific sales figures were achieved for each electric vehicle model. From 01/01/23, the IRA will not only remove these reductions, but also the caps on the number of sales, meaning vehicles like Teslas and Chevy Bolts will once again be eligible for the tax credit.
In an effort to increase domestic production of electric vehicles, the IRA requires that materials and components used in EV batteries increasingly come from domestic (North American) sources. With these stipulations, this means that you will have to pay attention not only to where an electric vehicle itself was assembled, but also where its battery bank was assembled and where the necessary materials come from. . The National Highway Traffic Safety Administration offers a VIN Finder Website to find the manufacturing plant for a specific vehicle, but when shopping for a new EV, you must insist with the dealership to confirm that the EV/PHEV you are considering purchasing qualifies for the full tax credit of $7,500 for EVs.
Other significant changes to the electric vehicle tax credit include vehicle price and income limits and the inclusion of used electric vehicles purchased from a dealership (effective 1/1/ 2023) for an amount of $4,000 or 30% of the value of the vehicle, whichever is less.
For more details, Edmunds has a great article with more details on the changes to the electric vehicle tax credit.
Final Thoughts
With utility kWh rates continuing to rise, now really is a great time to go solar, save your power, and maybe even start planning for a solar-charged EV. Check out our blog post on how to claim the federal solar tax credit to see how easy it is to save 30% on the cost of installing a solar power system!