How Does The Solar Tax Credit Work?

If you’re considering installing solar panels on your company or house, you’re likely familiar with the federal solar tax credit.

The federal government is granting a federal solar tax credit to offset the cost of solar panel installations for commercial firms and private households across the United States.

Although the solar tax credit was slated to expire in 2020, federal legislation has extended it as a financial incentive to promote green energy, ensuring that it remains a viable and beneficial option for anyone considering solar.

The following information summarizes all you need to know about the solar tax credit.

What Is The Solar Tax Credit?

A brief history: The solar tax credit was established in 2005 with the goal of making solar energy more affordable for American homes by lowering their tax liability on the purchase and installation of solar energy systems. The solar investment tax credit (ITC) was extended until 2015; later, Congress passed the 2016–2019 federal spending bill, which extended the solar panel tax credit further by retaining the 30% tax credit for taxpayers who purchase and install solar panels by December 31, 2019.

However, when Congress passed a large omnibus spending package — $900 million for coronavirus relief — it included another solar tax credit extension. Residential solar tax credits will be 26 percent from 2020 to 2022 and then decrease to 22 percent in 2023 under the new legislation. Unless Congress chooses to extend it, the credit will expire in 2024.

Solar projects in all sectors — residential, commercial, and industrial — that begin construction between now and 2021 are eligible for the 26% tax credit. Additionally, while the tax credit for homes will expire in 2024, a 10% tax credit will be available for utility and commercial markets beginning in January of that year.

The federal solar investment tax credit makes it simple and economical for Americans to migrate to solar energy. You can claim it on your federal income tax return as a deduction for the cost of your solar photovoltaic (PV) system, battery storage, and installation. The percentage difference is determined by the year your system was built, which is between 2020 and 2024.

How Will You Benefit From The Solar Tax Incentive?

Solar panels are typically viewed as a significant home improvement investment. However, the majority of customers go solar with minimal initial costs and eventually realize considerable long-term savings by lowering or even eliminating their electric bill.

Indeed, the average home saves between $20,000 and $40,000 over the lifespan of its solar energy system.

Going solar normally takes a couple of months to secure essential licenses and inspections, install the system, and then power it on – but the wait is well worth it. The following are the most compelling financial reasons to go solar.

REDUCE YOUR ELECTRIC BILL

Solar panel installation enables you to generate energy for free. Even if you are unable to generate 100% of the energy required for your house or business, your monthly utility bills will be significantly reduced.

NET METERING

This utility billing mechanism enables solar owners to sell excess energy to the grid in exchange for utility bill credits. Each of our three service areas (Texas, Colorado, and Florida) has implemented net metering with local utility companies.

PROPERTY VALUE INCREASE

Solar-paneled homes have been proved to sell for more than those without; therefore, if you ever decide to sell, your home will most likely have a greater property value.

INCENTIVES FOR STATE TAXATION

Certain states offer tax incentives to help make solar ownership more affordable.

Colorado and Florida both exempt solar panel purchases from state sales tax (or sales and use tax), effectively lowering the system’s upfront cost. Similarly, Texas and Florida statutes give a property tax exemption to ensure that homeowners do not incur higher property taxes on the increased value of their home as a result of solar panel upgrades.

Along with the federal solar tax credit, local incentives may be available to assist offset installation expenses. For example, Austin Energy and CPS Energy in San Antonio both provide solar rebates. Our complete list of solar rebates is available here.

Who Is Eligible For The Income Tax Credit?

You may be eligible for the solar investment tax credit if you meet the following criteria:

  • You acquired and installed your photovoltaic system between January 1, 2006 and today, or intend to do so by December 31, 2023.
  • Your photovoltaic system is installed on a residential or commercial property in the United States.
  • Your solar panel system is brand new or has never been used previously; the solar tax credit can be claimed only on new equipment installations.

How Do I Submit An Application For The Solar Tax Credit?

Solar tax credits are available if you purchase a solar energy system for your business or residence. When you file your annual federal income tax return, you can claim the solar tax credit.

Notify your accountant if you installed solar panels within the last year. If you are self-employed, you will simply utilize tax form 5695.

IS THE SOLAR TAX CREDIT SUBJECT TO AN INCOME LIMIT?

If you’re concerned about income restrictions, there is no upper income limit for ITC eligibility. However, you must have a sufficient tax liability charge to obtain the full credit.

IS THE FEDERAL SOLAR TAX CREDIT TRANSFERABLE?

If you do not have enough tax liabilities to claim the entire solar tax credit in a given year, any residual credits will transfer over to subsequent years as long as the tax credit remains in place.

IS THE TAX CREDIT FOR SOLAR ENERGY REFUNDABLE?

The ITC is not refundable. However, under Internal Revenue Code Section 48, the credit may be carried back one year or carried forward for the next 20 years.

Therefore, if you do not have a tax liability this year but did last year, you can still claim your credit; or if you do not have a tax liability this year but will in the next two decades, you can still claim your credit.