State Solar Panel Incentives, Rebates, and Tax Breaks
Jul 7th 2021
Solar power systems have been a popular alternative for generating energy for many years, and it seems their popularity will continue on an upward trajectory in the years ahead. Solar energy systems help reduce reliance on non-renewable forms of energy, like coal or natural gas, and are more environmentally friendly than fossil fuels.
However, the value of installing a solar panel system goes beyond reduced electric bills and renewable energy. Thanks to numerous federal and state programs, you can reduce the cost of installing solar panels on your home by up to 50%, making solar power more accessible than ever.
As you might expect, knowing exactly which programs are available and how you can take full advantage of them may be a little confusing. This article should help answer many of your questions about solar financing and incentives, so you can start saving money on your energy costs.
What Solar Incentives Do Homeowners and Businesses Have Access To?
Many solar incentives are available to both homeowners and businesses for installing solar equipment and generating renewable energy. These incentives come from the federal government, states, and organizations like utility companies. Businesses and homeowners can take advantage of these solar incentives, although the process is different for each party.
However, what makes these solar incentives more complicated is that the programs available to you depend on where you live—especially in which state. It’s also important to note that these solar incentives are all intended for solar power system owners. If you’re a renter or you’re involved in a solar lease program, you won’t be eligible for these programs.
Investment Tax Credits for Solar Energy
Of all the solar incentives available, the one uniformly available program to all Americans—no matter which state they live in—is the solar tax credit, otherwise known as the Investment Tax Credit (ITC). This tax credit is a dollar-to-dollar reduction of your total income tax, meaning for every ITC dollar you claim, that same amount reduces your tax burden.
According to the current guidelines, solar photovoltaic (PV) systems you have installed during 2021 are eligible for a 26% solar tax credit, with that amount dropping to 22% in 2023 before ending in 2024. The 26% rate applies to the solar PV panels and contracting costs, storage devices like batteries, balance-of-system equipment such as inverters, and sales tax assessed on certain items.
However, there are some limitations. As mentioned before, to take advantage of these solar incentives, you must be the solar power system owner, whether it’s installed on a primary or secondary residence within the United States or as part of a qualified community solar project. The system must be new and fully installed by the end of the year. You won’t receive the tax credit if you’ve purchased but have not installed a solar panel kit. Finally, you must have bought the system yourself, either in cash or with solar financing, although any fees and charges are not eligible for the tax credit.
As far as the quantity you can receive, there is no limit to the amount you can claim on the ITC. However, because it’s a non-refundable tax credit, you won’t receive any overpayment in the form of a tax rebate. However, that doesn’t mean that you lose out on any excess tax credit you should have received. Instead, you can roll over that excess amount to the following year.
It’s important to note that other rebates, tax credits, or other solar incentives may impact the amount of money you receive from the ITC. Because these rules change frequently, and because the amounts can be confusing if you’re not used to dealing with tax credits, it’s a good idea to make sure you have all the information you need, or to consult with a tax accountant before filing your return.
Federal Business Solar Incentives
While the ITC is intended for homeowners and residential properties, there are similar programs available for businesses, which can help defray the cost of installing solar systems on their property. Typically, these tax credits involve much higher dollar figures, since commercial properties tend to have much higher energy needs.
However, there are cases when homeowners need to be aware of the regulations regarding commercial solar incentives. For homeowners who have a home office, or who have a business located on the same property, it’s more complicated to claim the ITC.
According to the US Department of Energy, if more than 80% of the cost of your solar equipment is determined to be a residential expense, then you can claim the entire amount as a residential ITC. However, if less than 80% is attributed to your residence, then you can only claim that percentage on your individual tax return. However, the remaining percentage can be claimed as a business expense—so don’t miss out on that!
State Tax Credits
In some states, homeowners who install solar PV panels are eligible for tax credits similar to those available from the federal government. Where it can get confusing is the differences between the different states. Still, it’s definitely worth investing the time learning about all of the tax credits available to you, regardless of which state you’re in.
These solar incentives are designed to encourage homeowners to install solar PV systems. No matter how complicated they may seem, there’s always someone willing to help you find the answers you need to take advantage of these solar incentives. Usually, all you have to do is ask.
How Tax Credits Differ by State
Depending on the state you live in, you may have a range of available solar incentives, from income tax credits to rebates from installing solar panels on your home. While your state tax credit may change the amount of tax you can claim on your federal return, in general these programs don’t directly impact how much you can claim through the ITC.
Tax credit policies can differ greatly from state to state. Some have more stringent requirements for claiming a tax credit, while others may cap the total amount you can claim at a much lower level. Some states may require more documentation to verify the date your equipment was installed, and you may also be required to show that your system is currently generating power.
Whatever the case, these solar incentives are designed to make installing solar PV systems more affordable for homeowners. If you have any questions, be sure to consult your local tax laws, as well as websites like the Database of State Incentives for Renewables and Energy ( https://www.dsireusa.org).
States That Don’t Offer Solar Tax Credits
While only about 20 states offer direct tax credits for solar installation, there are many other solar incentives you can use to defray the cost of your solar power system. There’s also a good chance that, as solar continues to grow in popularity, more states will introduce solar incentives for consumers, including credits, deductions, and special solar financing options.
It’s also important to make sure you don’t focus solely on tax credits as the only solar incentives available to you. Be sure to investigate all possible options that might be available to you, and don’t be afraid to contact local experts who can help guide you through the solar financing and installation process.
Cash Rebates
One of the many available solar incentives offered by states are cash rebates. However, it’s not just states that offer rebates. Many local cities or municipal governments have rebate programs, as do utility companies and other organizations. These solar incentives provide you a direct cash payment for installing solar PV panels, helping further defray the cost.
Many times, these rebates need to be claimed within a limited period of time after installing your solar power system, whether you hired a solar installer or opted for DIY solar. As you probably expect, the details depend on where you live, since each group offering a cash rebate will have their own policies.
It is important to note that while any rebate you receive from your utility company will not be counted as taxable income by the federal government, it will be subtracted from the amount you can claim for the ITC. Essentially, the ITC considers the final cost to you, and with the cash rebate from the utility company, that cost has been reduced.
Solar Renewable Energy Credits (SRECs)
In many states, there’s legislation mandating that utility companies produce a specific proportion of their power from renewable sources, like solar power. For residents of these states, you’ll receive solar renewable energy credits, or SRECs, equal to the amount of electricity that you generate from your solar power system.
These SRECs can then be sold to utility companies for a market rate, which they then use to meet their mandatory minimum amount of renewable energy. As a result, these solar incentives can end up generating thousands of dollars per year, which can offset your energy costs and solar installation costs. While it’s difficult to figure SRECs into your solar financing plan, they can go a long way toward lowering your long-term energy costs.
Performance-Based Incentives (PBIs)
While SRECs are standard in some states, others use other solar incentives called Performance-Based Incentives, or PBIs. Under these solar incentives, your utility company will pay you per kilowatt-hour of electricity your solar energy system produces. Typically, the rate your utility will pay for your PBI will be determined when you install your system, usually involving mechanisms to respond to fluctuations in the market price over time.
Some states do place restrictions on these solar incentives, however. Many states require that you use only solar equipment that was manufactured in the state. All states also require that metering technology be installed as well, to track how much electricity is being generated by your solar power system.
Additional Solar Incentives
In addition to the programs mentioned above, there are several other solar incentives available designed to make installing solar equipment as affordable as possible. From solar financing to additional tax effects, these programs can cut the cost of installing a solar power system even further.
Accelerated Depreciation
Businesses that install solar PV panels are able to take advantage of the Modified Accelerated Cost Recovery System (MACRS), which helps them lower their tax burden while shortening the amount of time it takes to see returns on their investment in solar power.
Introduced in 1986, MACRS allows companies to designate a period of time to write off the value of tangible properties. For solar equipment, businesses can claim depreciation over a period of five years. These solar incentives can lower the overall cost of a company’s solar power system significantly, by up to 30%.
Accelerated depreciation is an important point to consider in regard to solar financing. With an early return on investment, this can make solar financing even easier.
Tax Exemptions
Many states and cities offer tax exemptions as solar incentives, usually in one of two forms: property tax exemptions and sales tax exemptions.
When it comes to property taxes and solar PV panels, installing solar power can dramatically increase the value of your property. However, for states and municipalities that offer property tax exemptions, you won’t suffer from that increase. These solar incentives exempt these improvements when assessing the value of your home, meaning that you won’t see an increase in your property taxes.
Another of the more popular solar incentives is the sales tax exemption. In areas where your solar equipment is exempt from sales tax, you could end up saving hundreds—or thousands—of dollars on your final bill.
Solar Financing
While some homeowners may be able to pay cash to install a solar power system in their home, most homeowners will need solar financing to be able to afford their new system, even with solar incentives. Because solar loans are relatively new compared to other kinds of loans, people frequently find they have more questions—which is only natural.
Solar financing works much like other home improvement loans, which you might take out to renovate a bathroom, redo your kitchen, or build an addition to your home. And just like any other loan, with solar financing you borrow a certain amount from a lender that you promise to pay back with interest. These payments take place monthly over the life of the loan.
Just like other loans, solar financing has several factors for you to consider. A lower interest rate, for instance, means you’ll pay less over the life of your loan. However, the length of your loan will also determine how much you owe, with longer solar financing terms carrying lower monthly payments, but usually with a higher overall cost. You can also find secured and unsecured solar financing, which can also dramatically impact the terms of your agreement.
There are a number of factors that will affect the terms of your solar financing, so you should be as familiar as possible with the following:
What Banks Offer Solar Financing?
There are a number of different lenders who will offer you solar financing, which means there are several options available for you to find the best available rates. Solar panel manufacturers are often willing to offer solar financing, As are many utility companies. Solar financing through your utility company is especially convenient, since they can simply add your monthly payment to your utility bill.
Other lending institutions, including credit unions and national institutions, offer financial products and services that are tailored specifically for solar financing. Credit unions, which are typically local to the homeowner, are especially valuable, as they tend to offer lower rates on their loans.
Finally, you can often find assistance with solar financing from government institutions. Municipalities frequently offer solar financing that is paid off through annual payments as part of your property taxes. Other times, government agencies will create agreements with private companies to establish low-cost solar financing options.
How Long are Most Solar Financing Loans?
While you can find loans for as few as 3 years or as many as 30, most solar financing terms tend to fall between 10 to 20 years, which is similar to the terms on home improvement loans. You should be aware, of course, that the longer the loan terms, the lower the interest rate tends to be, as well as your monthly payments.
Secured vs. Unsecured Solar Financing
Many homeowners take out home equity loans for their solar financing. These loans are based on the value of your home and how much you’ve paid into it, and use the home itself as collateral against the loan. As a result, the interest rates are usually lower, typically between 3% and 8%.
Unsecured loans, on the other hand, don’t involve collateral of any kind, relying instead on your credit score to determine your interest rate. Because of this, the rate can vary widely, and they tend to be higher than secured loans. You can expect to pay a rate between 5%-20% on unsecured solar financing.
Is Solar Financing Tax Deductible?
For many loans, the amount of interest paid is tax-deductible, lowering your tax burden. While this is also true of secured solar financing, interest paid on an unsecured loan is not considered tax-deductible. You should also be aware that unsecured loans may also carry hidden fees, which may not be visible until you finish your loan.
Subsidized Loans
Many states and other government agencies are interested in helping homeowners secure solar financing, and oftentimes this takes the form of subsidized loans. These loans typically offer homeowners solar financing at terms below market value, making it easier to install solar power systems in their areas.
These subsidized loans benefit everyone, not just the homeowner. With more solar PV panels installed, the burden on the electric grid is lessened, and as is the reliance on fossil fuels. Not only does this make it easier to provide power for the community, but it can also result in a financial benefit for the municipality, depending on the laws governing the state.
Making Solar Work for You
If your head is spinning a little bit, it’s okay. There’s a lot that goes into installing a solar power system into your home, and it’s important to know everything that you’re going to encounter. Beyond making sure your system can generate enough electricity to meet your home’s power needs, you want to make sure you’re making the best financial decisions when it comes to installing your system.
When it comes to solar financing, be willing to do some research. When you start making calls or requesting quotes, you’re going to get a lot of communications from lenders, and the more prepared you are before these messages start pouring in, the more likely you are to find the best terms for your loan—and that’s worth the extra effort up front.
But also keep in mind the various solar incentives that are available to you. In addition to the federal ITC, your state likely has a number of programs available to defray the cost of your new solar power system. But you should also check out what your city or municipal government might be offering, as well as your utility companies. You can even find solar incentives from manufacturers and installers.
Above all, though, remember why you’re installing your solar PV panels in the first place. With smart solar financing and by taking advantage of all available solar incentives, you could end up saving yourself a lot of money over time, while also doing your part to help make sustainable energy the future.
