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The Federal Residential Solar Energy Credit

Average Solar Growth over last 10 years: 33%!

Solar Investment Tax Credit: (2022 Information)

What is a tax credit?

A tax credit is a dollar-for-dollar reduction from your yearly income tax. The federal tax credit is sometimes referred to as an Investment Tax Credit (ITC) though there is a separate ITC offered to businesses that own solar systems.

Example: Claiming a $2,000 federal tax credit reduces your federal income taxes due by $2,000. 

What is the federal solar tax credit?

The Federal Residential Solar Energy Credit is a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system. (Other types of renewable energy are also eligible for similar reductions in taxes.)

 

The system must be placed in service during the tax year and generate electricity for a home located in the United States. There is no bright-line test from the IRS on what constitutes “placed in service,” but the IRS has equated it with completed installation.

 

In December 2020, Congress passed an extension of the ITC, which provides a 26% tax credit for systems installed in 2020-2022 and 22% for systems installed in 2023. There is no maximum amount that can be claimed.

This tax credit expires starting in 2024 unless Congress renews it.

 

Am I eligible to claim the federal solar tax credit?

You might be eligible for this tax credit if you meet all of the following criteria:

  • Your solar PV system was installed between January 1, 2006, and December 31, 2023. 

  • The solar PV 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. The IRS has permitted a taxpayer to claim a section 25D tax credit for purchase of a portion of a community solar project.

  • You own the solar PV system (i.e., you purchased it with cash or through financing, but you are neither leasing nor are in an arrangement to purchase electricity generated by a system you do not own).

  • 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.

What expenses are included?

The following expenses are included:

  • Solar PV panels or PV cells used to power an attic fan (but not the fan itself).

  • Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees.

  • Balance-of-system equipment, including wiring, inverters, and mounting equipment.

  • Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed (however, the energy storage devices are still subject to the installation date requirements).

  • Sales taxes on eligible expenses.

How do other incentives I receive affect the federal tax credit?

For current information on incentives, including incentive-specific contact information, visit the Database of State Incentives for Renewables and Efficiency website.

Rebate from Electric Utility to Install Solar:

 

Under most circumstances, subsidies provided by your utility for you to install a solar PV system are excluded from income taxes through an exemption in federal law. When this is the case, the utility rebate for installing solar is subtracted from your system costs before you calculate your tax credit.

 

Example: If your solar PV system was installed before December 31, 2022, cost $18,000, and your utility gave you a one-time rebate of $1,000 for installing the system, your tax credit would be calculated as follows:

0.26 * ($18,000 - $1,000) = $4,420

Payment for Renewable Energy Certifications:

When your utility, or other buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental attributes of the electricity generated (either upfront or over time), the payment likely will be considered taxable income. If that is the case, the payment will increase your gross income, but it will not reduce the federal solar tax credit.

 

Rebate from State Government

 

Unlike utility rebates, rebates from state governments generally do not reduce your federal tax credit.

 

Example: If your solar PV system was installed before December 31, 2022, installation costs totaled $18,000, and your state government gave you a one-time rebate of $1,000 for installing the system, your federal tax credit would be calculated as follows:

0.26 * $18,000 = $4,680

State Tax Credit:

 

State tax credits for installing solar PV generally do not reduce federal tax credits—and vice versa. However, when you receive a state tax credit, the taxable income you report on your federal taxes will be higher than it otherwise would have been because you now have less state income tax to deduct. The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on state and local tax deduction, which may impact whether a state tax credit impacts federal taxable income. The end result of claiming a state tax credit is that the amount of the state tax credit is effectively taxed at the federal tax level.

Example: The net percentage reduction for a homeowner in New York who claims both the 25% state tax credit and the 26% federal tax credit for an $18,000 system is calculated as follows, assuming a federal income tax rate of 22%:

0.26 + (1 – 0.22) * (0.25) = 45.5%

**Note: Because reducing state income taxes increases federal income taxes paid, the two tax credits are not additive (i.e., not 25% + 26% = 51%). In this example, an $18,000 system total cost reduction would be:

[$18,000 * 0.26] + [$18,000 * (1 – 0.22) * (0.25)] = $4,680 + $3,510 = $8,190

 

Frequently Asked Questions: Solar Tax Credit

 
When does the federal solar tax credit expire?

The federal solar tax credit is set to expire at the end of 2023. There is hope that the tax credit may be extended once again. The Biden Administration has plans to include a 10-year extension of the tax credit in future legislation. There is no guarantee this will be approved by Congress and it may be at a lower rate.

 

This means you shouldn’t wait too long for a #futuresolutionsupfit!

How do I claim the solar panel tax credit?

Make sure to seek professional tax advice and ensure you are eligible for the credit. To claim your Solar Investment Tax Credit (2022):

  • Complete IRS Form 5695 when you filling your tax return

    • On part 1 of the form, you will calculate how much you are eligible for, and then you enter that amount on your form 1040.

 

Instructions on filling out the form are available here.

 

Are solar batteries covered by the solar investment tax credit?

The Internal Revenue Service (IRS) specifies that battery installations for which “all energy that is used to charge the battery can be effectively assured to come from the Solar Energy System” are eligible for the full solar tax credit.  

Solar batteries like the Tesla Powerwall and the LG Chem are eligible for the solar tax credit if they are charged by solar energy more than 75% of the time. 

This means that if you install a battery with a new solar system, you will save 26% on the total combined cost.

 

Can you claim the solar tax credit on an investment property that you own and rent out?

You can claim the tax credit on an investment property that you own and rent. 

However, it can’t technically be claimed under the residential solar tax credit.

 

There are two federal solar tax credits: one for homeowners and one for business owners, and in this case, your property would qualify under the “business” tax credit. They have slight differences in their yearly step-down schedules and are under different tax code sections, but currently, they are both worth 26% of the cost.

 

I am not a Homeowner! Do I still qualify for the tax credit?

You do not necessarily have to be a homeowner to claim the tax credit. A tenant-stockholder at a cooperative housing corporation and members of condominiums are still eligible for the tax credit if they contribute to the costs of an eligible solar PV system. In this case, the amount you spend contributing to the cost of the solar PV system would be the amount you would use to calculate your tax credit. However, you cannot claim a tax credit if you are a renter and your landlord installs a solar system, since you must be an owner of the system to claim the tax credit.

Do I qualify if Solar PV was installed on my vacation home in the United States?

Solar PV systems do not necessarily have to be installed on your primary residence for you to claim the tax credit. However, the residential federal solar tax credit cannot be claimed when you put a solar PV system on a rental unit you own, though it may be eligible for the business ITC under IRC Section 48. See 26 U.S.C. § 25D(d), which specifies that eligible solar electric property expenditures must be “for use at a dwelling unit located in the United States and used as a residence by the taxpayer” (emphasis added).

 

What if my panels are on my property but not on my roof?

The solar PV panels located on your property do not necessarily have to be installed on your roof, as long as they generate electricity for use at your residence.

 

What if my Solar PV system was financed and isn’t paid off?

If you financed the system through the seller of the system and are obligated by contract to pay the full cost of the system, you can claim the federal solar tax credit based on the full cost of the system. Miscellaneous expenses, including interest on financing, origination fees, and extended warranty expenses are not eligible expenses when calculating your tax credit.

 

Can I apply if I purchased Solar Panels but have not installed them yet?

The tax credit is ONLY for systems that were “placed in service” during the year, meaning they are installed and producing electricity for the homeowner. This would NOT be eligible.

Key 2022 Takeaways: Solar Tax Credit

 

The Federal Residential Solar Energy Credit is a federal credit equal to 26% of the costs of a solar installation completed before 2023.

The tax credit will decrease to 22% for installations completed in 2023.

Homeowners who pay taxes can qualify for the tax credit when they install solar panels on a home they own, even if it isn’t their main home.

Solar batteries such as the Tesla Powerwall and LG Chem are eligible for the solar tax credit, as well.

This tax credit expires for residential installations starting in 2024 unless Congress renews it.

There is no better time than now for a #futuresolutionsupfit!

For More Information on The Federal Solar Tax Credit

 
Internal Revenue Service (IRS):

(800)829-1040

 

1111 Constitution Avenue, N.W., Washington, D.C. 20224

The Federal Statute and IRS Guidance:

 

 26 USC § 25D at www.gpo.gov

“Q&A on Tax Credits for Sections 25C and 25D”

 

www.irs.gov

 

Updated information on the current status of the ITC:

Database of State Incentives for Renewables and Efficiency entry on “Residential Renewable Energy Tax Credit”

 

www.dsireusa.org