Investment Tax Credit (ITC)

The Investment Tax Credit (ITC) is one of the most important federal incentives driving solar adoption in the United States. It allows homeowners, businesses, and utility-scale developers to reduce their federal tax liability by claiming a percentage of the total installed cost of a solar PV system.

The ITC has transformed the U.S. solar industry by lowering upfront costs, improving project economics, enabling better payback periods, and making clean energy more accessible. For installers, developers, EPCs, and finance professionals, understanding the ITC is essential for accurate proposal modeling, ROI calculations, and long-term project planning.

ITC calculations are commonly incorporated into tools such as Solar Proposals and financial modeling workflows using SurgePV’s Generation & Financial Tool.

Key Takeaways

The Investment Tax Credit (ITC) is a federal incentive that reduces the cost of solar installations.
The ITC percentage applies to the entire installed cost of a solar project.
Bonus credits may increase ITC for qualifying projects.
ITC calculations are essential for solar proposals, financial modeling, and ROI forecasts.
Solar installers, EPCs, and developers must stay updated on evolving IRS and federal policy requirements.

What Is the Investment Tax Credit (ITC)?

The Investment Tax Credit (ITC) is a federal incentive that allows taxpayers to claim a credit equal to a percentage of the cost of installing a solar energy system. The credit applies to:

Equipment
Labor
Engineering & permitting
Balance-of-system components
Sales and use taxes (in many jurisdictions)
Interconnection and inspection costs

The ITC is a dollar-for-dollar reduction in the federal tax bill—not a deduction—making it one of the most powerful economic levers in renewable energy.

The ITC percentage can vary depending on system type, project compliance, and additional bonus incentives available under recent legislation.

Related concepts include Net Metering, ROI, Payback Period, and PPA.

How the ITC Works

1. Determine Total Installed Cost

This includes equipment, engineering, permitting, labor, soft costs, and BOS components.

2. Apply the ITC Percentage

For qualifying solar projects, the ITC equals a percentage of the total project cost.

ITC Value = Total System Cost × ITC Rate

3. Reduce Federal Tax Liability

The credit reduces taxes owed. If the credit exceeds the tax bill, unused credits may be carried forward.

4. ITC Can Combine with Other Incentives

Layered incentives may include:

State/local rebates
Utility incentives
Production-based incentives
Bonus credits under Inflation Reduction Act

5. Critical for Financial Modeling

Solar proposals and economic tools—such as SurgePV’s calculators—integrate ITC automatically for accurate ROI forecasting.

See: Solar ROI Calculator.

Types / Variants of the ITC

1. Residential ITC

Available to homeowners who install solar on primary or secondary residences.

2. Commercial/Business ITC

Available to commercial, industrial, and utility-scale solar projects.

3. Bonus ITC Adders (If the project qualifies)

Certain projects may receive additional percentages for:

Domestic manufacturing
Low-income community installation
Energy community siting
Distributed rooftop serving multi-family
Prevailing wage & apprenticeship compliance

4. Transferable ITC for Businesses

Businesses can transfer or sell their tax credit to another entity, enhancing project financing flexibility.

5. Direct Pay (Elective Pay)

Some nonprofit or public-sector entities may qualify for direct reimbursement in lieu of tax appetite.

How the ITC Is Measured

1. System Cost Basis

The credit applies to all eligible project costs.

2. ITC Rate

The standard ITC rate (as defined by legislation at the time of installation).

3. Bonus Eligibility

Adders increase the effective ITC percentage.

4. Tax Liability & Carryforward

Unused credit may roll forward depending on IRS rules.

5. Interaction With Depreciation

Commercial projects may combine ITC with accelerated depreciation (MACRS).

Typical Values / Ranges

Practical Guidance for Solar Designers, Installers & Developers

1. Incorporate ITC early in the proposal stage

Use tools like Solar Proposals to show accurate savings and payback.

2. Ensure cost basis is calculated correctly

Include all eligible hard and soft costs.

3. Check qualification for bonus credits

Especially for C&I and utility projects.

4. Update your financial models annually

ITC percentages change over time depending on national policy.

5. Use solar calculators for customer education

Tools such as the Solar Loan Calculator and Solar ROI Calculator help demonstrate the value of ITC to clients.

6. Document all costs and compliance steps clearly

Essential for audits, tax filings, and investor reporting.

7. Coordinate with tax professionals

Developers should always validate ITC assumptions with accountants or tax advisors.

Real-World Examples

1. Residential Rooftop Solar

A homeowner installs a $20,000 solar system.

ITC = 30% → $6,000 federal tax credit.

Customer’s effective cost becomes $14,000.

2. Commercial Solar Project

A company builds a $250,000 rooftop array.

Base ITC: 30% → $75,000 credit.

If located in an energy community with domestic-content equipment, ITC may increase to 40–50%.

3. Utility-Scale Project

A 50 MW solar farm qualifies for multiple bonus credits.

Total ITC could reach 50%–60% of the project’s cost basis, significantly improving investor returns.