The Federal Solar Investment Tax Credit has been a popular credit that has driven growth in the industry. Since it’s inception it has been a 30% credit on the total investment that comes right off the bottom line of your taxes. That is set to change in 2020.
The bottom line is the credit is being reduced to 26%. An extension of the 30% rate was stripped out of a House bill in late 2019 that would have given the industry more time to adjust. Sadly, consumers will see a 4% drop in the tax credit amount.
However, it’s not all bad news for consumers. We expect there to be cost reductions at each level of the distribution chain as participants squeeze each other to take on a part of the 4% loss to consumers in order to maintain sales levels. Manufacturers, distributors, and contractors will each likely take responsibility for some of the difference. In an industry with razor-thin margins already, this will be tough. However, with less profitable entities dropping out of the market and a bigger barrier to entry, strong competitors can remain successful.
In addition, the industry is maturing and costs continue to come down as new materials are introduced and methods are improved.
Looking To The Future
While the tax credit is reduced effective immediately, it drops even further to 22% in the year 2021 and sunsets to 0% in 2022 (the commercial investment tax credit goes to 10% in 2022 and remains permanent). This sunsetting of the credit should drive consumers to pursue installations in 2021 to make sure they maximize their benefit.
The industry will lobby hard to have tax credits extended. At a minimum, we would expect the post-2022 credit for residential installations to be extended permanently like the commercial credit. The loss of credits altogether would be a devastating blow to the industry where only the strongest competitors survive to serve the reduced number of clients who want to pursue solar power.
The Case for (and Against) Continued Credits
There is a school of thought that the Federal Government should not be picking winners and losers. However, traditional energy producers have been and continue to be heavily subsidized both directly and indirectly by tax policy. It is disingenuous to suggest that the solar energy industry is receiving an unfair handout.
The solar energy industry has been a terrific growth industry for quality new-economy jobs, well-paid installers, and for U.S. manufacturing and distribution as well.
We would love the solar industry to succeed without tax credits and are working aggressively to achieve cost savings that make the technology affordable enough for everyone. Like many new industries, incentives drive innovation and eventually, the industry can stand on its own. That can’t be said for the traditional energy sector, which relies heavily on the government for incentives like tax, infrastructure, and security.
For now, we hope the U.S. Congress will revisit the extension of tax credits but are also working to provide value for our clients with practical solutions regardless of what the tax situation is now and in the future.