The Federal ITC was first signed into law as a part of the Revenue Act of 1962, and was created with the intention to stimulate economic growth in the United States by providing incentives for businesses to purchase or modernize certain assets. Today this fundamental goal of the Federal ITC remains the same, though the ITC now has a focus of stimulating private investment in renewable energy infrastructure. Since its original enactment, the Federal ITC has gone through several changes. It has been suspended, extended, and terminated several times, and the size of the federal tax credit has fluctuated significantly due to tax reform acts from various political climates.
It was the Energy Policy Act of 2005, which made the Federal ITC more or less what it is today. This Act signed into law by President George W. Bush, increased the tax credit from 10% to 30% of eligible costs for solar and fuel cell projects. This 30% ITC was extended in 2006 through the Tax Relief and Healthcare Act, and extended again in 2008 though the Emergency Economic Stabilization Act. The Emergency Economic Stabilization Act extended the 30% ITC through 2016 and because as of yet no other act has been passed extending the expiration of the 30% Federal ITC, the 30% tax credit is set to expire on December 31, 2016.
As we are closing in on the end of 2013, the expiration date for the Federal ITC is now only about 3 years away. Current law states that projects will only be eligible for the 30% Federal ITC if they have been placed in service prior to the December 31, 2016 expiration date. Requiring a “placed in service” designation means that, projects that are underway at year-end in 2016, even if they are near completion, will NOT be eligible for the 30% tax credit.
So what is set to happen on January 1, 2017? As of now, in January 2017, the Federal ITC is set to reduce from 30% back to 10%, reverting to the ITC amount that was in place prior to the Energy Policy Act of 2005. There will likely be other changes to the ITC in 2017, for example there will be the possibility of reinstating a dollar cap for the ITC, which also existed prior to the Energy Policy Act.
The current 2016 expiration date for the 30% Federal ITC was based on the assumption that by year-end 2016, solar energy would have become more efficient, and that solar installation costs would have reduced more or less proportionately to the decrease in tax incentives. This is obviously a rather large assumption and what may be a more practical question relating to the 2016 expiration date is, whether the renewable energy industry can survive such a significant reduction in tax credit allocation? Whether or not the renewable energy industry will adapt and persevere, waits to be seen. There is still a possibility that an extension of the Federal ITC will be granted. Throughout the history of the Federal ITC, as well as with many other Federal and State tax credit programs, it has not been uncommon for programs to become extended with the efforts of lobbyists. Either way, the renewable energy industry is able to continue to take advantage of the 30% Federal ITC through at least year-end 2016.