Energy and Financial Consulting

iRS Investment Tax Credit (ITC)


The Investment Tax Credit (ITC) is a U.S. federal corporate tax credit that is applicable to residential, commercial, industrial, utility, and agricultural sectors. Eligible technologies for the ITC include: Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaic's, and Solar Hybrid Lighting. This program is co-administered by the Internal Revenue Service (IRS) and the U.S. Department of Energy (DOE).

History of Energy Tax Credit

The history of federal energy tax policy can be divided into four eras: the oil and gas period from 1916 to 1970, the energy crisis period of the 1970s, the free market era of the Reagan Administration, and the post-Reagan era.

The United States federal energy tax policy historically focused on the increased production of oil and natural gas with no focus on alternative energy or conservation. Two policies were the driving force that allowed this policy to become successful. The first was expending of intangible drilling costs (IDCs). This allowed companies to write off costs such as labor costs, material costs, supplies, and repairs associated with drilling a well which allowed companies to write off their startup costs to make a profit in their startup year. The second policy was depletion allowance that allowed oil and gas producers to claim 27.5% of revenue as a deduction for the cost of exhaustion or depletion of the deposit. This allowed for reduced capital investment and encouraged businesses to develop their resource faster. Oil and gas production increased from 16% of total U.S. energy production in 1920 to 71.1% of total energy production in 1970.

Large revenue losses associated with the oil and gas tax preferences compared to federal deficit cuts, the oil embargo of 1973, and the Iranian Revolution from 1978-1979 led to a shift in energy policy to alternative energy and conservation. The first major change was the reduction of IDCs and percent depletion for the oil and gas companies. The second change was the implementation of the Energy Tax Act of 1978 which started taxing cars with subpar fuel economy. New energy tax credits were also placed. Examples include investment in conservation or alternative fuels technologies, such as synthetic fuels, solar, wind, geothermal, and biomass. There was also tax credits for production of alcohol fuels, percentage depletion for geothermal deposits, and exempting facilities that turned solid waste into fuel from federal taxation of interest.

The Reagan Administration brought along a more neutral stance on energy tax policy that did not promote oil and gas development, energy conservation, or the supply of alternative fuels. This would allow true oil prices that were very high to be shown and would encourage private investment in alternative energy development. The tax credits previously put in place were not renewed and only the tax credits for business solar, geothermal, ocean thermal, and biomass technologies were extended. This, however, resulted in negative effective tax rates for many investments, including alternative energy investments. The lowered tax credits for oil and gas were still high enough to make those investments a more attractive option.

Current Energy Tax Policy

On June 28, 2005, the Senate approved an expansive energy bill with an 11-year, $18.6 billion package of energy tax breaks with a renewed focus toward renewable energy resources and conservation. Tax credits were introduced  for Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaic's, Wind, Biomass, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, CHP/Cogeneration, Solar Hybrid Lighting, Microturbines, and Geothermal Direct-Use.

These tax credits were greatly expanded in 2008 as part of the Energy Improvement and Extension Act of 2008. The American Recovery and Reinvestment Act of 2009 is the latest expansion of energy tax credits and has laid out the framework of tax credit policy.

Incentives Solar

Technologies that directly convert solar energy to electric, heat water, and heat space are included in the tax credit. Solar credits do not have a maximum. 26% of all expenditures can be included in the ITC credit. Eligible technologies for the solar credit are equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Hybrid lighting systems that use fiber optics to distribute light and illuminate the inside of a building are also eligible for the credit. Passive solar systems and solar pool heating systems are not included in the credit.

Why is the Solar ITC Important?

The investment tax credit for solar has been tremendously successful in increasing deployment and lowering costs of solar energy. Since ITC was put into place, solar prices have consistently fallen year after year while installation rates and efficiencies have continued to climb. The success of the ITC shows that a stable, long-term incentive can reduce prices and create jobs in solar energy.

• The ITC has fueled dramatic growth in solar installations. The market certainty provided by a multiple-year extension of the residential and commercial solar ITC has helped annual solar installation grow by over 1,600 percent since the ITC was implemented in 2006 - a compound annual growth rate of 76 percent.
• The ITC has increased U.S. solar manufacturing capacity. The sharp growth in project installations after passage of the ITC occurred in tandem with growing domestic U.S. solar manufacturing. Today, over 500 manufacturing facilities produce solar components across 48 states.
• The cost of solar for consumers has continued to fall. The existence of the ITC provides market certainty for companies to develop long-term investments that drive competition and technological innovation, which in turn, lowers costs for consumers.