How Does The Solar Tax Credit Work? The Ultimate Guide
February 11, 2021
Thinking about making the switch to solar power for your home or business? You’re in luck. The federal government is offering a federal solar tax credit for 2021 to help subsidize the purchase and installation of a solar panel system for residential homeowners and commercial businesses throughout the United States.
Although it was originally set to expire in 2021, recent federal legislation just extended this incredible financial incentive as part of a clean energy push. Want to take advantage of this amazing opportunity for your home and business before it expires? Here’s everything you need to know about the solar tax credit.
How Does the Solar Tax Credit Work?
The federal solar investment tax credit (ITC) makes it easier and more affordable for Americans to make the switch to solar power. It can be claimed on federal income taxes for 26 percent of the cost of a solar photovoltaic (PV) system and battery storage. This allows you to deduct 26 percent of the cost of installing a solar energy system and battery backup from your federal income taxes.
Solar projects in all sectors — including residential, commercial, and industrial — that start construction in 2021 and 2022 are eligible for the 26 percent tax credit. The incentive drops to 22 percent in 2023, and beginning in 2024 it will decrease to 0 percent for homeowners. The commercial and utility markets will still benefit from a permanent 10 percent credit starting in January 2024.
The ITC applies to both residential and commercial systems, and there is no cap on its value.
When Does the Federal Solar Tax Credit End?
A little history: The solar tax credit for homeowners was created in 2005, giving taxpayers 30 percent off the price of a home solar installation. The ITC was extended annually or biannually until 2015, when it got a long-term extension that included a phase down, dropping to 26 percent in 2020, 22 percent in 2021, and down to zero after 2021.
However, Congress recently passed an extensive omnibus spending package that included $900 million in coronavirus relief — and part of that relief included an extension for the solar tax credit. Under the new legislation, the residential solar tax credit will not expire after 2021. Instead, it will continue at a rate of 26 percent for an additional two years, helping make solar power more affordable to all.
Who Is Eligible for the ITC?
If you meet the following criteria, you may be eligible to benefit from the solar investment tax credit:
- Your solar energy PV system was placed in service before December 31, 2021, to claim the credit in 2022; or your solar energy PV system was placed in service before December 31, 2022, to be claimed in 2023.
- Your solar power setup is located at a residential or commercial business location within the United States.
- You purchased and own the PV system.
- Your solar panel system is new or being used for the first time. This distinction is important, because the solar tax credit can only be claimed on the original installation of your solar equipment.
Can the Federal Solar Tax Credit Be Carried Over?
As long as you purchase your solar energy system, you are eligible for the solar tax credit. Even if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” the remaining credits into future years for as long as the tax credit is in effect.
How Do I Claim the Solar Tax Credit for My Home or Business?
You claim the solar tax credit when you file your annual federal tax return. Remember to let your accountant know that you’ve gone solar in the past year. If you file your own taxes, you’ll simply use tax form 5695.
Looking for Texas or Colorado Solar Installers?
Here at Freedom Solar, we’re passionate about making the switch to solar power easier and more affordable for homeowners and business owners like you. We’re here to take care of every part of the process, from finding every available financial incentive to installation, lifetime service, and monitoring.
We are the leading solar provider in Texas, and we have recently expanded into Colorado. Freedom Solar provides solar energy for countless homeowners and businesses who have chosen us for our expert installations and our friendly, helpful installers — even big corporate names like Whole Foods and Office Depot! Plus, our socially distanced installation process means we can set up your panels without ever needing to come inside your home.
If you’re ready to start generating a lifetime of green energy, we’re here to help you begin the journey. Contact us today for a virtual consultation!