Tesla Reminder: Solar Power Tax Credit Drops In 2021

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Last year and for several years prior, a US taxpayer who installed a solar power system on their roof could get a 30% tax credit on the cost of that system. In 2020, that tax credit was reduced to 26%, and it will drop to 22% next year.

Confused about what a tax credit is? It’s basically straight cash if you owe taxes at the end of the tax year. “A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000,” the US Department of Energy writes.

Given that this solar tax credit cut is coming up and rooftop solar power is a decent portion of Tesla’s business, the company recently tweeted out a reminder of the approaching deadline.

Order solar panels before the solar tax credit drops at the end of this year. Pair with Powerwall to experience no more blackouts!https://t.co/gvX4KnG2ca

— Tesla (@Tesla) November 11, 2020

Was working with Tesla rep regarding solar install recently. His recommendation was to submit an order in October in order to be able to get the 26% credit. System has to be installed and powered on, which requires approval from your utility company, which is the bigger holdup.

— Hate the Living (@DannyBaugh) November 15, 2020

Just to clarify, this policy change applies to any solar power system, not just a Tesla one. And I always recommend that anyone considering going solar go ahead and get quotes from multiple solar installers in your area (it’s always free to get a quote). However, from what we’ve seen this year, it appears that it’s very hard to compete with Tesla. Tesla rooftop solar PV systems ($100 off if you use that link, my Tesla referral link) come in at a price far below the national average. Whereas the US average is $2.19/watt, Tesla is now offering rooftop solar PV for a uniform price of $1.49/watt across the country — both prices take into account the 26% federal solar tax credit.

If you don’t understand how that could be the case, note that I had a chat with Elon Musk about it a couple of months back and the explanation makes a lot of sense to me. The short story is that Tesla doesn’t have big marketing/customer acquisition and financing costs. Also, with uniform system sizes, Tesla doesn’t spend as much time (money) on system customization. Elon told me:

“Solar panel cost is only ~50 cents/Watt. Mounting hardware, inverter and wiring is ~25 cents/Watt. Installation is ~50 cents/Watt, depending on system size.

“The other solar companies spend heavily on salespeople, advertising and complex financing instruments. We do not.”

This is one of the big benefits or synergies that Elon referenced when Tesla gobbled up SolarCity in the second half of 2016. Tesla’s brand is so well known and so many people go to Tesla stores or the Tesla website to buy cars every day that it adds basically no cost to get buyers to consider Tesla’s solar power systems as well. Other rooftop solar companies have to spend money — quite a lot of it — in order to get in front of customers’ eyes, and those extra company costs raise the price of their solar power systems.

Overall, due to years of solar panel cost drops, solar power has become the cheapest option for new electricity capacity around the world, the International Energy Agency recently report. In the United States, solar, wind, and natural gas account for almost all new electricity generation capacity, and solar is often #1. While solar panel costs will surely keep coming down, the US solar tax credit provides a nice financial boost that must stimulate many purchases. Naturally, rooftop solar PV costs much more than large utility-scale solar PV on a cost per kWh basis, but rooftop solar power competes with retail electricity prices, not wholesale electricity prices.

Aside from a conventional rooftop solar PV system, Tesla also offers its unique Tesla Solar Roof — solar roof tiles that serve the double purpose of generating electricity and acting as traditional roof tiles. This system costs more than a conventional solar PV system, but if you need to replace (or build) a full roof anyway, it can be cost competitive. One of our writers has one of these Tesla Solar Roof systems and has explained this in detail via the calculations he did for his own roof. (Though, the price of a Solar Roof system is much lower now than it was a year ago.) Importantly, this Tesla Solar Roof option is also eligible for the US solar tax credit.

Regarding that tax credit, let’s come back to why it is dropping on January 1, 2021, and how the tax credit phaseout is scheduled.

At some point, Congress decided that falling solar power costs meant the solar tax credit should be phased out. (Do not bring up the fact that fossil fuels still benefit from various subsidies or the fact that we need to transition away from fossil fuels urgently in order to stabilize our climate.) The tax credit dropped from 30% to 26% on January 1, 2020, and the next drop (to 22%) comes on January 1, 2021. Without a renewal or extension from Congress, the US solar tax credit goes away completely on January 1, 2022. So, without some surprise down the road, the cheapest rooftop solar you can get in the coming few years is probably what you can get right now.

“The system must be placed in service during the tax year and generate electricity for a home located in the United States. There is no bright-line test from the IRS on what constitutes ‘placed in service,’ but the IRS has equated it with completed installation,” the Department of Energy (DOE) writes. There is no maximum credit — the total tax credit is simply based on the cost of the system and how much tax liability you have. “The following expenses are included:

• Solar PV panels or PV cells used to power an attic fan (but not the fan itself)
• Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees
• Balance-of-system equipment, including wiring, inverters, and mounting equipment
• Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed (however, the energy storage devices are still subject to the installation date requirements)
• Sales taxes on eligible expenses.”

There may also be state or regional tax credits or rebates available in your area. Look into it if you are going solar or considering it.

Any questions? Many more answers can be found in this DOE document. Alternatively, I or others could potential answer them down in the comments.

As noted above, feel free to use my Tesla referral code — ts.la/zachary63404 — to get $100 off a Tesla solar power system (either kind) in addition to the US solar tax credit.