What are Investment Tax Credits?
What are investment tax credits and how can one make use of them? Investment tax credits (ITC) are a federal tax incentive for business investments, which allows an individual or business to deduct a certain amount as a percentage of investment costs from their taxes. These credits are in addition to normal allowances for depreciation but differ from accelerated depreciation in that they offer a percentage deduction of the cost at the time the asset was purchased.
Investment tax credits were introduced in 1962 to protect American businesses from possible foreign competition, but today we see a different incentive as their objectives have changed to deploy credits in areas of green technology, pollution control, energy conservation and further economic development. There are various ways that tax credits are deployed, such as Reforestation Tax Credit, Solar Energy Investment Tax Credit or even the Rehabilitation Tax Credit.
So how does it work?
The federal solar energy credit is a tax credit that allows you to claim 26% of the total cost of the solar system installation. This system or project, whether on a home or even a farm, must be installed in service during the tax year and generate electricity in the United States. This tax credit is claimed against the tax liability of residential or commercial and utility solar energy property, each having requirements of their own. There are two different types of ITC here, the first being residential (under section 25D) where residential investment tax credits allow the homeowner to apply the credit to their personal income taxes, from a solar system that they have had installed in their home. The second, being commercial and utility (Section 48), where a business develops, installs, or finances a solar project and then claims the credit from that project.
So overall, an Investment Tax Credit is a dollar-for-dollar reduction in the income taxes an individual or business would otherwise pay the federal government and is based on the size or amount of the investment in solar projects or property, in line with the regulations set by the government.
Jeanne Altern
Jeanne is passionate about business, copywriting and social media. During her time at Regent Renewables her understanding of the solar energy industry and blockchain technology has grown drastically, giving her the ability to share some of that knowledge via her writing.