What You Need to Know About the Solar Investment Tax Credit
A customers’ most common question is, “What is the Solar Investment Tax Credit (ITC)?” In this post, we will go over all of the details you need to know about the solar tax credit; what the credit is, eligibility requirements, benefits, and more.
First Off, What is a Federal Tax Credit?
By definition, a Federal Tax Credit is a dollar-for-dollar amount that an individual or business can directly reduce from their owed taxes — taxes you would otherwise owe the government. There are two types of tax credits; refundable and non-refundable. Keep in mind, this is not a tax exemption or tax deduction, which are indirect reductions to the factors of your tax bill — a reduction to your taxable income prior to calculating the taxes you owe. People will generally save more in taxes from a credit, rather than a deduction.
What is the Solar Investment Tax Credit (ITC)?
The Solar Investment Tax Credit is a non-refundable tax credit that can be reduced from your owed taxes for 30% of the cost of your solar energy system. If you have sufficient tax liability, a non-refundable tax credit will reduce what you owe, but it will not exceed the amount you owe. You will not get a tax refund for what is left if the amount of your solar tax credit exceeds what you owe. Your remaining credits will be carried over to the following tax year instead.
The tax credit for solar does not have a maximum limit. You can still claim the full 30% credit without having to worry about a limit. Whether your solar panel system — plus installation — costs you $100,000 or $1,000,000.
Energy Incentives are Time Sensitive
The IRS currently has deadlines on these residential energy incentives — your solar energy system must be placed into service by a certain date to be eligible for the tax credit. The date that your solar panel system is approved to operate determines the year you can claim your tax credit.
- Only the solar PV systems that are placed into service prior to 12/31/2019 will be eligible for the 30% investment tax credit.
- The tax credit amount will step down to 26% for solar PV systems put into service between 01/01/2020 and 12/31/2020.
- Systems put into service between 01/01/2021 and 12/31/2021 will be eligible for a 22% solar tax credit.
- After 01/01/2022, then the solar tax credit will no longer be available for residential applications.
- Unlike the Residential Renewable Energy Tax Credit, the Business Energy Investment Tax Credit will still get a tax credit of 10% for solar energy systems placed into service beyond the end of 2021.
You will need to file IRS Form 5695 with your tax return in order to claim your solar tax credit. IRS Form 5695 has you calculate the proper credit amount, which you will then enter on your 1040.
Am I Eligible for the Solar Tax Credit?
Before you can claim the tax credit — like most credits, rebates, or deals — there are eligibility requirements. Whether you’re incorporating solar into your residence or your business. Below is a list of the requirements that make you eligible for the Solar Investment Tax Credit:
- Solar PV system must be providing energy for your home — your system must be approved and in service.
- Applicable electrical and fire code requirements must be met.
- Your system must be placed into service — up and running — after 01/01/2006 and on, or before, 12/31/2021.
- You must own the PV system, whether it was a cash purchase or finance. If you are leasing the system, then you are not eligible for the investment tax credit.
- Your solar equipment products must be new, not used.
- Your system must be placed into service — up and running — after 01/01/2006 and on or before 12/31/2021.
- Your solar energy system must be used by someone that is subject to U.S. income taxes. This excludes tax-exempt organizations like charities, schools, and churches.
- Your solar system must be located within the U.S.
- The generated energy cannot be used to heat a swimming pool.
Additional Eligibility Requirements for Solar Water Heating:
- The solar water heating equipment must be performance certified by the Solar Rating Certification Corporation (SRCC) or another source endorsed by the governing state where the property is installed.
- At least 50% of the energy used to heat the water must be solar generated.
- The solar investment tax credit only applies for water used within the house or building — within the dwelling.
If you’re looking to claim your solar investment tax credit on the current tax year, then you will need to consider the time it takes to get the proper permits, the installation time, and the “go ahead” from the utility company to flip the switch on your solar panel system. This process can take upwards to 10 weeks.
Solar Tax Credit Benefits
You have the ability to benefit from this federal tax credit, whether you’re installing a residential solar panel system or even a full solar project for your business. Below are some of the benefits one can expect with the solar ITC:
- You can claim the installation costs as part of the credit.
- You can offset the tax balance that you owe to the government.
- The IRS allows you to carryover the remaining balance of your tax credit to the following years.
- You’re essentially only paying for 70% of the net cost of your solar energy system. This is in the event that you have a higher tax liability — income taxes owed — to put the credit toward.
Keep in mind, if you don’t normally owe money when doing your taxes, then you will not benefit from the solar ITC.
Benefits of Owning a Solar Energy System
In addition to the Federal investment tax credit, there are many more amazing benefits to owning solar energy:
- Depending on your energy offset, you will save lots of money.
- Your solar investment typically pays for itself in the first 5-7 years. Beyond that, your solar is a complete return on investment!
- As a result of installing solar, the value of your home increases as much as $4 per watt.
- You lock in low energy rates with Net Metering 2.0.
- Most of all, Mother Earth will be your best friend for going solar and reducing your carbon footprint.