The hefty cost of a solar energy system can be intimidating for many. Reassuringly, the government is doing all it can to make the move to solar more economical, and the solar tax credit program they’ve introduced is one of the best steps toward achieving that goal. Let’s take a deeper look into what the solar tax credit is and how it works.

Federal Solar Tax Credit – What Is It?

The Solar Tax credit is an incentive offered by the United States federal government for residential and commercial property owners that have gone solar or are in the process of doing so. The solar tax credit is more appropriately referred to as The Federal Solar Investment Tax Credit (ITC).

The primary purpose of this incentive is to reduce the cost of solar energy systems for residential and commercial property owners, thereby promoting solar energy in the United States by encouraging more and more property owners to install solar energy systems on their properties.

How Does Solar Tax Credit Work?

The proposal for The Federal Solar Investment Tax Credit (ITC) program was first conjured in the 2005 Energy Policy Act.

Thereafter, the federal government enacted this tax credit program in 2006, and stats presented by the Solar Energy Industries Association (SEIA) conclude that the solar industry in the United States grew by 10,000% as a direct result of this program. So how does solar tax credit work, you ask?

The federal solar tax credit works by allowing residential and commercial property owners to lower their tax bills by a certain amount, given that they install a solar system on their properties that satisfies the specified terms and conditions.

The amount by which your tax bill will be reduced is equal to a certain percentage of the net cost of your solar panel system installation. It is worth knowing that the policy slightly differs for residential and commercial properties and also that the percentage tax credit offered decreases from year to year.

Seeing as how the solar tax credit is being offered by the federal government, it is only available for property owners in the United States, that too if the system was installed within the specified timeframe as stated under the subsections of the program.

A 30% tax credit was initially available for solar energy systems that were installed prior to December 31, 2019. In the December of 2020, the United States Congress extended the tax credit program till 2023, however, offering now a 26% tax credit, instead of the 30% that was offered before, for systems installed between 2021 and 2022.

The tax credit steps down to 22% for systems installed in 2023. Beyond this, however, is where the policies for commercial solar and residential solar parts way. For commercial and utility-scale solar systems installed after 2023, the tax credit drops to a permanent 10%. Meanwhile, the tax credit for residential systems expires, meaning a 0% tax reduction unless Congress extends the program again.

Knowing this, you can benefit from a 26% reduction on the net cost of your solar installation if you get it installed in 2022 and a 22% cost reduction if you get it installed sometime during the next year. As such, in terms of financial feasibility, now is the best time to go solar!

Federal Solar Tax Credit 2022 – Who Is Eligible?

Just as mentioned previously, the solar tax credit is only available for property owners in the United States whose solar energy systems meet the specified requirements listed in the subsections of the policy. Outlined below are the mandatory conditions that your system needs to satisfy in order to be eligible for the ITC program:

  • The solar energy system should be brand new, and it should have been installed no earlier than January 1, 2006, and no later than December 31, 2023. The ITC will expire in 2024 unless Congress renews it.
  • The systems should be in your ownership and not leased.
  • Only property owners located in the United States are eligible for the program.
  • For residential solar systems, the location of installation must be either your primary or secondary residency in the United States or a community solar project.

What Expenses Are Covered Under the Solar Tax Credit Program?

Listed below are the main expenses that the federal tax credit program will cover for your installation:

  • Solar PV Cells and PV Panels are used to generate the power.
  • The Assembly cos
  • installation cost
  • developer fees
  • Cost of on-site prepping done by the contractor.
  • Permitting fees
  • Sales taxes on the purchasing of solar equipment.
  • Inspection costs
  • Balance-of-system equipment includes an inverter, mounting equipment, and wiring.
  • Energy storage devices that are only charged by your solar panels, such as solar batteries. This is true even for cases where the energy storage device was installed in the upcoming tax year to when your solar energy system was installed.

 

How Does the Solar Tax Credit Work If I Don’t Owe Any Taxes?

The taxes that people pay are used to fund the government expenditures that ensure citizens have access to properly functioning and maintaining public services. Therefore, the government subjects the people to various forms of taxes, and each person and business must pay their due amount. Your tax liability is the amount of money you owe in taxes.

The amount of taxes you owe is determined based on a variety of factors, including your earnings from wages and salaries, as well as profits earned on the selling of assets. However, people who do not have any assets in their possession, have no source of income, or who have a very low source of income may be exempted from paying any taxes.

Seeing as how the tax credit program works by offering you a certain amount of reduction on your tax liability – the amount of tax you owe the government – if you qualify for a tax credit but do not owe any tax to the government, you won’t have any liable amount to which the credit can be applied, and therefore, the solar tax credit program will be of no benefit to you.

To summarize, in order to avail the entire amount of the solar tax credit that you can potentially be eligible for, you must owe the government at least as much in taxes as the credit amount.

How Many Years Can You Roll Over Solar Tax Credit?

The federal solar tax credit is a non-refundable tax credit. This entails that in the case that your tax liability for a single tax year is less than the solar tax credit you are eligible for, meaning that you owe the government less money than they owe you as a reimbursement for your solar installation, you cannot cash in the leftover credit.

Any unused portion of the solar tax credit, on the other hand, can be carried over to the next tax year. You can, however, roll over the unused tax credit for as long as the incentive is being offered. Keeping in mind that the ITC will expire for residential solar installations after 2023, you can rollover the balance until only 2023. Of course, if Congress were to extend the duration of the program, you’ll be able to carry over the balance beyond 2023 as well.

To put it into better perspective, let’s say that you have a solar energy system installed on the property that cost’s you $15,000. Applying a 26% tax credit to this amount qualifies you for a total tax deduction of $3,900. However, if your total tax burden is only $2,000 for that tax year, you can avail, at most, only a $2,000 tax deduction that year. The remaining $1,900 can be carried over to the next tax year and be used to reduce your tax liability for that year.

How to Claim Solar Tax Credit

You’ll be happy to learn that claiming the federal solar tax credit is easy and simple! Once you have established that you are eligible for the tax credit, all you’ll need to do is attach a filled out 5695 IRS Form when submitting your federal taxes. The ITC forms guarantee that you receive the entire amount of your tax credit.

In addition to solar panel systems, Tax Form 5695 also assists consumers in calculating tax credits for additional household energy upgrades such as solar water heating, solar energy storage, wind turbines, geothermal heat pumps, and fuel cells.

If the amount of your tax credit surpasses your tax bill, completing Form 5695 may additionally require you to calculate your rollover taxes. After that, put in the credited amount in the relevant field of Schedule 3 (Form 1040) – Additional Credits and Payments.

Because each person’s tax situation is different, if you have any doubts or uncertainties regarding how the solar tax credit fits into your overall tax return or your eligibility for the solar tax credit program, it is important that you seek the advice of a professional tax expert.

A silver lining in this entire process is that for most residential installations, the solar provider handles all the documentation, permitting, and filing for tax credits and incentives.

Can You Claim Solar Tax Credit Twice?

Technically speaking, if you own a house, you cannot claim the solar tax credit more than once is not a possibility. However, you can rollover any leftover tax credit balance to the following tax year for up to or close to five years, as explained above.

Note that you may be eligible for claiming the tax credit more than once in the case that you own multiple residential properties, all having solar energy systems. Although, it would be wise of you to consult with a tax specialist to confirm this and learn of any underlying intricacies and conditions.

When Can I Claim the Solar Investment Tax Credit?

Knowing when to apply for this solar incentive is vital because delaying the process beyond the permissible timeframe can result in you losing out on this golden opportunity to reduce the cost of your system.

According to the Solar Investment Tax Credit policy, one of the conditions that you need to meet in order to claim the tax credit is that you must apply for it in the same tax year in which your system was installed. The countdown for the availability of this policy begins once the installation of your system is completed and it is fully operational.

How Does the Federal Solar Tax Differ from a Refundable Tax?

In case of a refundable tax credit, if your tax bill falls short of your tax credit, you can get a refund on the surplus credit. Suppose you qualify for a tax credit of $1,500, but the tax you owe is just $1,000. In such a case, you can have the unused $500 refunded back to you.

In contrast, as previously explained that if your tax credit were to exceed your tax bill for the federal solar tax credit, your only option would be to roll over the balance to the following year.

Frequently Asked Questions (FAQs)

How Many Times Can You Claim Solar Tax Credit?

You can claim the solar tax credit only once. However, you may be able to claim it more times in case you have more than one solar-powered property.

Is the Solar Tax Credit Going to End?

For residential owners, 2023 will be the last year for the tax credit if the US congress does not extend the program.

Can I Claim Tax Credit for a System Bought Using a Solar Loan?

Yes! You can be eligible for the ITC with a loan-bought solar energy system provided that it meets the specified requirements.

Can I Claim ITC for a Leased System?

No, one of the main requirements of the ITC policy is that the system must be owned by the property owner.

How Does the Federal Solar Tax Credit Work?

The federal solar investment tax credit (ITC) works by reducing your tax liability by a certain amount which is equal to a certain percentage of your system’s net installation cost. For systems installed between 2021 and 2022, the tax credit will be 26% of the nest installation cost, while for systems installed in 2023, it will fall to 22%. Thereafter, the tax credit will be terminated.

Conclusion

The federal solar tax incentive was perhaps one of the most effective steps taken by the United States government towards promoting solar energy in the country. As a result of this program, an annual growth of 50% was seen in the solar industry during the last decade. With that said, solar is the future of energy, and now is the best time to go solar while the tax credit is still available, offering a substantial reduction in your solar installation’s net cost.

The team at Firefly Solar is ready to answer your questions and give you a no-obligation price quote. Feel free to call us at 864-252-7858 or book a consultation online. And we’ll get in touch within 24 hours.