Investment Tax Credit "Haircut"

While most people are already aware that the Investment Tax Credit (ITC) is a key federal credit allowing a 30 percent tax credit for qualifying solar systems, many may not know about the limitation that exists at the individual level that could potentially affect their allowable tax credit in any given year. It’s also important to remember that ITC is non-refundable, therefore, in order to take advantage of the credit, the taxpayer must have a tax liability to offset.

The ITC can offset only an individual’s regular and alternative minimum tax and cannot be used in correlation with tax such as self-employment tax or additional Medicare tax. The amount available to use in the applicable tax year is determined based on the total amount of these two tax liabilities owed. Form 3800, General Business Credit, is used to calculate the limitation and available credit, beginning with the gross ITC that is available to the taxpayer. Regular tax liability, prior to considering federal credits, as well as the alternative minimum tax liability, are then combined and reduced by credits such as foreign tax and electric vehicles, to determine the net income tax liability. (It is important to note that not all federal credits are applicable when figuring your allowable ITC credit).

Once the net income tax liability has been calculated, the next piece is working through the limitation amount. This step begins with reducing the previously calculated net income tax liability by $25,000 and multiplying the result by 25 percent. You will need your tentative minimum tax, calculated on page two of your 1040, as well as the net income tax liability above to determine the final credit. The greater of these two numbers is then subtracted from the net income tax to determine the final credit available to be taken in the current year.

The remaining ITC can be carried forward indefinitely but the amount available to be used will need to be calculated each year that the taxpayer has access to the credit moving forward. It is still unclear whether the ITC will be able to be carried forward indefinitely, or if the carry forward will cease once the ITC has expired.

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