Tax Credits for Solar Power

tax credits for solar installation

Adding solar panels to your home is a significant investment. While costly up-front, solar offers many perks - from electrical savings to economic impact and boosts for your business's bottom line. One major bonus that you may have heard of is tax credits. When you install solar panels for your home or business, you are eligible for tax deductions.

Curious about what your tax credit would be on the solar for your home or business? This article takes an in-depth look at tax credits when investing in solar. Speak to a financial advisor to learn how to take advantage of these tax perks and how they may differ in your state.

What is a Tax Credit?

A tax credit is an amount taxpayers can deduct from their total owing. So if you owe the government $1,000 in taxes, your tax credit of $1,000 will nullify your due payment. If your owed taxes are lower than the credit you're due, your credit will "roll over" into future years.

Some may refer to a federal tax credit as an Investment Tax Credit, or ITC.

Tax credits are incentives for homeowners and businesses to swap to solar. Investment into the solar industry, reducing greenhouse gasses, and saving earth resources are some of the reasons governments offer tax credits for solar users.

What is the Federal Solar Tax Credit?

You can claim federal income taxes for a percentage of your solar photovoltaic (PV) system's cost. Owners of renewable and clean energy sources can benefit from the tax credit.

As of December 2020, Congress approved an extension of the ITC. You're now allowed a 30% tax credit as a solar owner if you install your system before the end of 2022. From 2023, you're eligible for 22%. The ITC allowance can expire or alter, and it's best to ask a financial advisor for the current percentage benefit.

The ITC applies to residential and commercial systems, and there is no maximum amount or cap on what you can claim. You're liable for this benefit no matter what tax bracket you fit into.

Am I Eligible for Solar Tax Credit?

Consulting with your financial advisor is the best first step. Here are some conditions that may mean you're eligible for the tax credit:

  • You need to own your solar energy system and pay cash or finance it. You cannot claim the tax credit if you lease solar panels from a solar contractor.
  • You must purchase and use your solar PV system before December 2023 to benefit from the 30% tax credit.
  • The solar PV system needs to be new. You can only claim credit on the "original installation" of the solar equipment if you didn't purchase the original system. This means that if you purchased a home or system that had a solar system already installed, you could not claim the tax credit.
  • The solar system must be on your primary or secondary home in the U.S.
  • You can claim the tax credit if the solar PV system is on an off-site community solar project. Taxpayers can claim even if they share a solar system and own a portion of it. The solar power generated on a community project needs to be credited against the property's consumption and not exceed it.

What Does My Tax Credit Cover?

When you apply for the 30% ITC, you can include the following expenses:

  • The cost of your solar panels and PV cells.
  • Installation costs like labor, developer fees, permitting fees, onsite preparation by your contractor, and inspection costs.
  • Hardware equipment to get the system installed: wiring, inverters, mounting gadgets.
  • Energy storage batteries for saving excess power that the solar PV system generates.
  • Sales taxes on eligible expenses.

Can My Other Solar Incentives Affect the Federal Tax Credit?

Depending on your location, there are many other solar incentives for solar owners, like state programs and local utility rebates. Some of these incentives may impact your ITC, but the best scenario is when they are combined to lower the solar cost even more! Here are some other solar incentives you could benefit from and combine with your ITC:

Rebates From Your Electrical Utility Company

Subsidies from your electrical company for your solar power installation are generally excluded from income tax returns. So if your utility company gave you a once-off rebate of $1,000 for installing a solar PV system, deduct the rebate from the total installation cost before calculating the ITC.

State Solar Rebates

State solar incentives typically do not reduce your federal tax credit. Common encouragements for installing solar in your state may include renewable energy certificates, government rebates, and tax credits. Each state will have unique solar incentives, but if you live in Minnesota, New York, Texas, or California, you may get the highest incentives yet.

Renewable Energy Certificate Payments or Incentives

A cash incentive or contribution from your utility company or anyone selling renewable energy certificates is a part of your taxable income. You will therefore have a more substantial gross income. These perks will not reduce the federal solar tax income, and you can still benefit from the 30% tax credit when calculating your taxes.

Cash Rebates or Special Deals

An up-front rebate (or special deal) as an incentive to install solar reduces the expense of installing solar. Your municipality or utility company may offer these rebates during low seasons or to drive sales. They will not affect the federal tax.

Visit the Database of State Incentives for Renewables and Efficiency website for incentive-specific information and contacts for your state.

How do I Claim the Federal Solar Tax Credit?

You can claim ITC for your new solar system during tax season when you file your annual federal tax return. Make sure to let your accountant know as soon as you swap to solar. You will also need to ask your solar provider to supply you with the relevant documentation.

You can talk to your financial advisor or accountant for advice or follow these basic step-by-step instructions if you file your tax returns yourself.

  1. Download an IRS Form 5695 when you decide to organize your tax return.
  2. In part 1 of your tax form, calculate the credit. Your solar system will be filed as "qualified solar electric property costs." Fill in the project's cost as outlined by your solar project.
  3. Complete any calculations on lines 6a and 6b.
  4. Next, finish the calculations on lines 14-16. Use the IRS's Residential Energy Efficient Property Credit Limit Worksheet to determine any limitations.

Swap to Solar Today and Start Saving on Your Taxes

There are many benefits to switching to solar, and tax credits make it near the top of the list. Combining the exciting solar tax credits and incentives can save even more money on your solar system installation. You can then look forward to reduced monthly electrical costs, a lowered carbon footprint, and the ability to increase your home value.

Contact SwapToSolar for a free solar evaluation today, and you can reduce those tax expenses as soon as possible.

State and Federal Tax Credits Reference

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