CORRECTION: The original version of this post asserted that the tax reform bill eliminated the deduction on interest for home equity loans, an interpretation shared by many experts and analysts in the media. However, in February the IRS published a clarification that the deduction was suspended only for home equity loans used for personal living expenses, not home improvement projects.
Following weeks of intense speculation, headlines, and tweets, the Republican tax reform bill - known as the Tax Reform and Jobs Act of 2017 - was signed into law by President Trump just days before Christmas. Given the massive scope of the legislation and the accelerated schedule of its development, it’s no surprise that the numerous impacts of the bill on taxpayers in 2018 are still very much in the process of being unpacked - or, perhaps, unwrapped.
But what does the bill mean for homeowners thinking of getting solar panels installed? Tax credits have played a major role in encouraging the adoption of solar and other renewables in recent years, so this legislation was tracked very closely by the industry. The good news is, the federal solar tax credit was preserved. However, less widely-recognized provisions of the bill may affect homeowner options for financing their solar power systems.
Solar Tax Credit Survives
First, the good news: the 30% tax credit for the installation of home solar power systems, known as the Residential Renewable Energy Tax Credit, survived the tax reform process completely unscathed. While the weeks preceding the final bill were a bit of a rollercoaster, with various proposed provisions threatening to directly or indirectly undermine renewable energy, these changes would only have affected commercial wind and solar developers - not homeowners.
(And, thanks to effective action by the Solar Energy Industries Associationand other renewables supporters, as well as the strong, bipartisan supportenjoyed by wind and solar in Congress and in communities nationwide, these anti-renewables provisions were either eliminated or largely repaired - more on that below, however.)
Although the solar tax credit is unchanged, it’s important to keep in mind that an individual homeowner’s ability to take advantage of this credit is limited by his or her tax liability - that is, if you don’t owe taxes equal to or greater than 30% of the cost of your solar installation, you won’t be refunded the remainder (although it’s possible to claim the credit over two consecutive years). Thus, homeowners that went solar in 2017 or are thinking about going solar in 2018 should evaluate how the tax reform bill will impact overall their taxes owed when calculating the potential value of their solar tax credit.
Tax Reform Impacts on Solar Financing Options
When the tax reform bill was initially passed, many tax experts believed that it effectively killed the interest deduction for home equity loans, which would have been a significant change in the solar financing landscape. Some homeowners have financed their solar power systems with loans taken out against the value of their property. This favorable tax treatment effectively reduced the cost of this financing option in many cases, encouraging Americans to use home equity loans to finance everything from solar panels to cars to medical bills and higher education.
However, following an outcry from many homeowners as well as the National Association of Home Builders, the IRS published a clarification in late February: the interest deduction is suspended for home equity loans used to pay “personal expenses,” but not for loans used to “buy, build or substantially improve the taxpayer’s home that secures the loan.” Thus, the use of home equity loans for financing rooftop solar panels is unaffected.
For solar leases, the impacts are murkier. That’s because the tax credits created by homeowners that go solar with a lease go to the company that ultimately owns their installation - and their financing partners, who may be impacted by a provision in the tax bill known as the Base Erosion Anti-Abuse Tax (BEAT). This provision will limit the ability of multinational companies to use tax credits to offset their U.S. tax liabilities, which in turn will potentially reduce the appeal of providing lease financing to homeowners for some lenders.
As noted above, the renewables industry succeeded in winning a last-minute fix to address this issue, creating an exemption that would allow commercial developers to still claim 80% of the value of solar and wind tax credits against BEAT. However, industry analysts have cautioned that this and other changes made by the tax reform bill may still make business renewable energy tax credits less useful for institutional investors, which could potentially reduce financing availability for large-scale wind and solar projects as well as companies that lease solar power systems to homeowners.
The extent of these impacts on corporate renewables financing remains to be seen, let alone how that impact will translate into the terms offered to solar lease customers, but it will be an issue worth watching in 2018.
Momentum Grows for Solar Loans
Given the possibly weakening outlook for solar leases in the aftermath of the tax reform bill, it looks like solar loans may have even more momentum as they continue increasing their share of the solar financing market. Solar loans overtook leases as the most popular form of home solar financing in the last quarter of 2016, and they’re winning homeowners over for several reasons including better overall value, more flexibility, and more control over payments.
Of course, as the leading provider of solar loans in America, Mosaic may be slightly biased - but you don’t have to take our word for it. The National Renewable Energy Laboratory estimates that homeowners going solar with a loan or cash save 30% more than homeowners that lease, and EnergySage estimates that solar loans enable homeowners to capture 40-80% of the value of their solar power system compared to just 10-30% for leasing. That’s why Greentech Media wrote in early 2017 that “leasing was a necessary temporary solution that sparked the original growth of residential solar, but the future is cash and loans.”
After the tax reform bill, that may be more true than ever.