Two federal tax policies, the 30 percent Investment Tax Credit (ITC) and the 5-year Modified Accelerated Cost Recovery System (MACRS), have underpinned the solar industry’s remarkable growth over the past few years.
Investment Tax Credit (ITC)
The ITC is actually two credits in two different parts of the tax code. Section 48 of the Internal Revenue Code allows commercial solar project developers to deduct 30 percent of the project costs of their federal taxes. Under Section 25D of the Internal Revenue Code homeowners can deduct 30 percent of the cost of a solar system installation on their property off their personal federal tax obligations.
The Energy Policy Act of 2005 (P.L. 109-58) created the 30 percent ITC under both section 48 and 25D of the tax code, although there was a $2,000 cap for homeowners qualifying for the residential credit. The ITC was subsequently extended for an additional year before Congress passed an eight-year extension and lifted the residential cap by passing the Cantwell-Ensign Clean Energy Tax Stimulus Act of 2008 as part of the Emergency Economic Stabilization Act of 2008 (P.L. 110-347).
If Congress fails to extend the ITC before the end of 2016, the credit for residential systems will expire, and the credit for commercial systems will revert to the permanent 10 percent level established as part of the Energy Policy Act of 1992 (P.L. 102-486).
According to an October 2014 Deutsche Bank analysis, the 30% ITC, combined with continued falling solar panel prices, will allow as many as 47 states to have electricity prices on par with traditional sources of energy by the end of 2016. However, if the tax credit expires and drops to 10%, the report estimated that only 36 states will reach grid parity.
Modified Accelerated Cost Recovery System (MACRS)
The Tax Reform Act of 1986 (P.L. 99-514) created the Modified Accelerated Cost Recovery System (MACRS), which determines the depreciation schedule for business property investments, including solar generation assets. Depreciation refers to the decreasing value of business property over time. The IRS allows depreciation costs to be recovered on yearly tax returns under MACRS, and solar generation assets are classified as a five-year property and can be depreciated over a 5-year period.
MACRS is a part of public law that can always be changed, but it does not have an expiration date.
For more information on how Congressional proposals to modify the ITC and MACRS credits could significantly raise solar system installation costs, see the GW Solar Institute's September 2014 analysis, Tax Reform, a Looming Threat to a Booming Solar Industry.