The US solar industry continues to be a world leader, with over 10GW of new capacity installed in 2018 alone. A significant factor in this has been the Solar Incentive Tax Credit (ITC), which has yielded an average annual growth of 52% since it was enacted back in 2006. But as most solar contractors already know, the ITC program will reduce over the coming years before closing at the end of 2021. Will the end of the tax credits produce a drop in demand? Or will the industry continue to grow, with or without solar incentives?
We’re talking about what the ITC program is, when and how it will be closing, and how solar contractors can use this to maximize solar PV sales — now and in the future.
What Is the Solar Investment Tax Credit?
In simple terms, the ITC is a national solar incentive that allows system owners to claim a 30% deduction on their next tax return. The final amount is based on the total system cost, including equipment, installation, and permits.
As a quick example, if the total system cost is $15,000, the system owner is eligible to claim a $4500 (30%) deduction.
System owners can then use the IRS Form 5695 when filing their income taxes.
The ITC program has been a powerful driver in solar system installations, substantially lowering the total costs and reducing the financial payback period. For many who are on the fence about installing solar, the ITC can often be the determining factor in their decision.
When Is the ITC Program Ending?
Currently sitting at 30%, the ITC will be reduced by a few percent each year before it ends entirely at the end of 2021. From 2022 onwards, residential system owners will no longer receive tax credits, although commercial and utility-scale systems will still be eligible for a 10% deduction.
The Solar ITC Schedule:
2019: 30% tax credit
2020: 26% tax credit
2021: 22% tax credit
2022: End of Program (10% For Commercial & Utility)
Using the previous example of a $15,000 system, customers are eligible for a $4,500 credit in 2019, but only a $3,900 credit next year and a $3,300 credit in 2021 – a total difference of $1,200.
Although the program runs for another two years, the reduction of applicable credits will no doubt prove a strong incentive for customers to speed up their decision process.
Will Reduced Incentives Lead to a Drop in Sales?
The good news is that even with the ITC incentive gradually winding down, long-term solar sales will not necessarily decline as a result. The US solar market is expected to thrive in the 2020s, which many are calling ‘the solar decade.’
During the phase-out period, promoting solar incentives can help to create urgency, enticing customers to take advantage of higher financial savings. Before the program closes altogether in 2021, solar contractors will likely experience a high-volume sales period, as system owners seek to lock in the tax deduction before the cut-off date. Taking advantage of this pre-deadline boom will allow solar contractors to build a strong pipeline and maintain financial stability following the closure of the ITC program.
Looking at other countries, many have experienced steady (or even record) growth even as incentive programs have reduced or closed. Australia, for example, has seen an 80% reduction in its solar ‘STC’ credits since 2011, dropping solar incentives that once stood at $7,500AUD down to a mere $1,500AUD. And yet, 2018 was a record year for the Australian PV industry with the country now boasting the world’s 2nd highest solar capacity per capita.
It’s clear that while they are useful, financial incentives are not the primary driver of solar sales. Markets around the world have shown us that people install solar systems for a variety of reasons, including environmental conservation, energy independence, and even to power electric vehicles. And all of these are long-term drivers that transcend short-term discounts.
Preparing for the 2021 Cut-Off
With the winding down of the ITC in the next two years, solar contractors need to prepare themselves for the future. And with industry reports projecting US solar capacity to double in the next five years, the future is looking very bright indeed.
Without the addition of solar financial incentives, customer focus will shift more to system performance, reliability, and long-term value. The solar contractors that truly thrive will do so with a ‘back to basics’ approach, offering greater expertise, more advanced products, and the best overall customer experience.
And by working with an innovative supply partner, contractors can increase system quality, reduce costs, and maintain a strong market position in the post-ITC era.
It’s Critical to Work With the Right Suppliers
During the closure of the ITC program and beyond, it’s crucial to partner with a supplier that not only provides excellent products, but services and support to help your business grow.
Solerus Energy is an innovative supplier of solar equipment for both residential and commercial installations. With a complete range of high-quality components, combined with advanced design, quoting, and permit services, Solerus gives you a powerful advantage in a competitive market.