What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe to the IRS. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000.
How does the solar tax credit work ?
The federal residential solar energy credit is a tax credit that can be claimed on your federal income taxes for a percentage of the cost of your solar system.
The December 2020 COVID-19 Relief package and U.S. Federal government Omnibus spending bill made some key extensions for the federal tax credit. Any US taxpayer, business or consumer who starts installation of a solar system before January 1, 2023 is eligible to receive the full 26% solar ITC. That amount will phase down to 22% on January 1, 2023. Any project that is placed in service after December 31, 2025 will automatically qualify for a 10% ITC.
Am I eligible to claim the federal solar tax credit?
If you own your solar energy system, you are eligible. If you don’t have enough tax liability to claim the entire credit in one year, you can apply those remaining credits in future years as long as the tax credit is in effect. If you sign a lease or PPA with a solar installer, you are not the owner of the system, and thus you cannot receive the tax credit.
Other information that determines your eligibility for the 26% solar tax credit:
- Your solar system was installed between now and December 31, 2022.
- Your solar system is located at your primary or secondary residence in the United States, or for an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption.
- You own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing)
- The solar PV system is new or being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.
- Your system must be “placed into service” by the end of 2022. The IRS doesn’t define exactly what “place into service” means, but when your system is fully interconnected and your utility has granted you permission to operate, that’s safe to assume it’s in service.
What solar costs are covered by the ITC?
- Cost of equipment including wiring, inverters, and mounting equipment
- Solar panels or PV cells to power an attic fan
- Assembling and installing the system
- Installing wiring to the solar panel system
- Contractor labor costs for onsite preparation, assembly, or installation, including permitting fees, inspection costs, and developer fees
- Energy storage devices that are charged exclusively by the associated solar panels
- Sales taxes on the above eligible expenses
How Do You Calculate the 26% Solar ITC?
For homeowners, you calculate the 26% on the net installed cost after deducting any state or utility rebates. If the total cost for your solar installation was $18,000 and you received a utility or state rebate of $5,000, your total upfront expense is now $13,000. Therefore, to calculate the 26% ITC, the math is 26% x $13,000 = $3,380 solar tax credit.
Can I use the tax credit for a battery backup installation?
Currently, the solar tax credit can only be applied to battery backup installations when connected to a solar PV system.
How do I claim the federal solar tax credit?
To claim the credit for residential systems, you must file IRS Form 5695 to report your expenses.To claim the credit for commercial systems, you must file IRS Form 3468 to report your expenses. If the federal solar tax credit exceeds tax liability, that excess amount may be carried forward to the succeeding taxable year.
The federal solar tax credit makes going solar much more financially feasible for thousands of homeowners. Because the ITC will eventually expire, the sooner you start to build your solar installation, the better. We encourage you to speak with a tax professional for more information about the ITC if you have questions about getting started.
**The above information is for educational purposes only and should not be construed as legal advice. Please consult a tax professional for more information.**