HOW DOES THE SOLAR TAX CREDIT WORK? THE ULTIMATE GUIDE
August 4, 2021
If you’re debating adding solar panels to your business or home, you’ve probably heard about the federal solar tax credit.
The federal government is offering a federal solar tax credit to subsidize the purchase and installation costs of solar panel systems for commercial businesses and residential homeowners throughout the United States.
Although the solar tax credit was set to expire come 2020, federal legislation recently extended it through the coronavirus relief package as a financial incentive to push green energy — meaning that it continues to be a relevant and helpful option for anyone looking to go solar.
Here’s what you need to know about the solar tax credit.
WHAT IS THE SOLAR TAX CREDIT?
A little history: The solar tax credit was created in 2005, aiming to make solar energy more affordable for American homeowners by reducing taxes on their purchase and installment costs. The solar investment tax credit (ITC) was extended until 2015; then Congress approved the 2016 to 2019 federal spending bill and further extended the solar panel tax credit by maintaining the 30% off for taxpayers if purchase and installation were completed before December 31, 2019.
However, when Congress passed an extensive omnibus spending package — $900 million in coronavirus relief — another solar tax credit extension was included in it. Under the new legislation, the residential solar tax credit is 26% from 2020 through 2022, then dropping to 22% in 2023. The credit will expire in 2024 unless Congress chooses to renew it.
Solar projects in all sectors — including residential, commercial, and industrial — that start construction between the current year, 2021, and through 2022 are eligible for the 26% tax credit. And while the tax credit is set to terminate at 0% for homeowners in 2024, a 10% tax credit will be available for utility and commercial markets starting in January of that year.
The federal solar investment tax credit makes switching to solar power an easy and affordable transition for Americans. You can claim it when filing your federal income taxes for your solar photovoltaic (PV) system, battery storage, and installation costs. The difference in percentage depends on when your system was installed between 2020 and 2024.
HOW WILL THE SOLAR TAX INCENTIVE BENEFIT YOU?
Solar panels are generally considered a major home improvement project. But most people go solar with no money down upfront and eventually generate significant long-term savings by reducing or even altogether eliminating their electric bill.
In fact, the average home saves between $20,000 and $40,000 over their solar energy system’s lifetime.
The process of going solar typically takes a couple of months to obtain the necessary approvals and inspections, install the system, and then energize it — but it’s well worth the wait. Here are the top financial reasons to go solar.
Electricity Bill Reduction
A solar panel installation lets you generate free energy. Even if you don’t produce 100% of the power that your home or business requires, your monthly utility usage will drastically decrease.
This utility billing method allows solar owners to send their unused energy to the grid in exchange for credits on their monthly utility bill. Our three service areas (Texas, Colorado, and Florida) all have net metering in place throughout the state with local utility companies.
Increase in Property Value
Homes with solar panels have been shown to sell at a higher price than those without; so, if you should ever decide to sell your home, you’ll most likely see a higher property value.
State Tax Incentives
Some states offer tax incentives to make owning solar more affordable.
Colorado and Florida both allow an exemption from the state sales tax (or sales and use tax) for the purchase of solar panels, which effectively reduces the upfront price of the system. Similarly, Texas and Florida law provide a property tax exemption to ensure that homeowners will not have to pay additional property taxes on the increased value of their home as a result of their solar panel additions.
In addition to the federal solar tax credit, there may be local rebates available to help in reducing installation costs. For example, Austin Energy offers a solar rebate for solar power, as does CPS Energy in San Antonio. You can see our full list of solar rebates here.
WHO IS ELIGIBLE FOR THE ITC?
If you meet the following criteria, you may be eligible to benefit from the solar investment tax credit:
- You purchased and installed your PV system sometime between January 1, 2006 and today, or plan to by December 31, 2023.
- Your PV setup is located at a residence or commercial business within the United States.
- Your solar panel system is new or has never been used before; the solar tax credit can only be claimed on original equipment installations.
HOW DO I CLAIM THE SOLAR TAX CREDIT?
If you purchase a solar energy system and it belongs to your business or household, you are eligible for the solar tax credit. You can claim the solar tax credit when filing your annual federal tax return.
Make sure to let your accountant know that you’ve installed solar panels in the past year. If you file your own taxes, you’ll simply use tax form 5695.
IS THERE AN INCOME LIMIT FOR THE SOLAR TAX CREDIT?
If you’re concerned about income limitations, there’s no maximum cap to qualify for the ITC program. However, you’ll need a tax liability charge that’s large enough to claim your full credit.
CAN THE FEDERAL SOLAR TAX CREDIT BE CARRIED OVER?
If you don’t have sufficient tax liability to claim your entire solar tax credit in one year, your remaining credits can carry over into future years as long as the tax credit is in effect.
IS THE SOLAR ENERGY TAX CREDIT REFUNDABLE?
The ITC is a nonrefundable credit. However, according to Section 48 in the Internal Revenue Code, the credit can be carried back one year, or carried forward in the next 20 years.
Therefore, if you don’t have a tax liability this year, but you had one last year, you’ll still be able to claim your credit; or if you don’t have one this year but will at one point in the next two decades, your credit will still be available for claiming.
FREEDOM SOLAR IS AN INSTALLER YOU CAN TRUST
A solar panel installation is a big project, and it’s important to know that you’re working with a reliable and reputable team. Whether you’re an average homeowner or a large business such as Whole Foods or Office Depot, Freedom Solar is dedicated to making our clients’ switch to solar power an easy and affordable transition.
So if you’re thinking about going solar, ready to make the switch to a lifetime of green energy, or interested in reducing your tax burden by lowering your electric bill, we’re here to help you begin the journey with our 7 Steps to Solar process.
We’ll find every available financial incentive, practice COVID-19-conscious installation methods, and offer lifetime service and monitoring to meet your needs! Take a look at what our customers say on how we deliver on our promises. Contact us to request a free, no-obligation virtual consultation with one of our energy consultants; or, if you’d like to learn more about the ITC, visit Energy Sage and the Solar Energy Industries Association (SEIA).