How Does Solar ITC Work?
A Comprehensive Guide
Green energy is the future, and governments worldwide are encouraging households to make the switch. The US government is no exception to this rule. The Federal Solar Tax Credit has been in place since 2005. The goal is to incentivize households to transition to solar, but time is running out on this credit.
The residential and commercial solar tax credit has seen tremendous success, with thousands of homes switching to greener energy. Here’s what you need to know about the federal investment tax credit (ITC).
What is Solar ITC?
The ITC solar tax credit is a type of credit you can claim via your Federal income tax. Rather than acting as a deduction, it reduces what you owe on your taxes for the year you decide to claim it.
The value of the Solar ITC has changed since its introduction in 2005. As of August 2022, you can claim 30% of the total installation costs of your solar system thanks to the Inflation Reduction Act (IRA).
This is great news for homeowners choosing to go solar in 2023 and beyond. Before the Inflation Reduction Act increased the tax credit, the ITC step-down was set to go from 26% in 2022 to 22% in 2023.
Unlike other tax credits, there is no cap on the amount you can claim back with the ITC solar tax credit. Installing your solar panels will enable you to claim back thousands of dollars on your installation costs, providing an instant return on your investment.
Now that we’ve answered, “What is the investment tax credit?” how do you qualify?
There are a few eligibility requirements. As long as you are a US resident or citizen and own your own home, you can claim back 30% of the installation costs of your solar system.
Just be aware that repurposing an existing system will not qualify you for the Solar ITC. The system must be entirely new.
How Does the Solar Investment Tax Credit Work?
As previously noted, taking up the ITC offer means you can claim 30% of the installation costs of a new solar system on your property. Claiming the deduction will be applied to your personal federal income taxes. Some states may also offer additional incentives you can apply to your state taxes.
Tax credits are a dollar-for-dollar reduction in your income taxes. The value of the credit differs depending on whether the system is installed on a residential or commercial building.
Just be aware that the solar ITC cannot provide you with a tax refund, only a reduction in your tax liability. For example, if your solar panel system costs $19,000, under the current rules, you would be able to claim a $5,700 tax deduction.
However, if your tax liability is less than $5,700, you can roll the remaining amount over to your following year’s taxes.
What’s Covered by the Solar ITC?
Your tax credit covers various expenses involved in installing your new solar-powered energy system. The following items are all covered when valuing how much you can claim through the ITC:
- Panels – Both solar photovoltaic panels and solar cells.
- Additional Equipment – The tax credit will also cover any other components required to run the system, such as mounts, wiring, balance-of-system equipment, and inverters.
- Batteries – The ITC will cover any storage devices, such as solar batteries. However, storage devices must be used exclusively by your solar panels. This rule changes to cover all energy storage devices, regardless of their exclusivity, starting from January 1, 2023.
- Labor – All labor costs related to the preparation and installation of solar panels. It also includes inspections and permitting costs.
- Sales Taxes – Any sales taxes paid are also covered under the ITC.
In short, everything related to getting your green energy system up and running will qualify under the terms of this tax credit. It is what makes it such a valuable incentive for a green future.
Make sure you have a fully itemized invoice if you claim this tax credit. Audits are rare, but you must provide a paper trail if you are randomly selected.
The Solar ITC Extension Explained
The tax credit was slated to step down from 26% to 22% starting from 2021 before the ITC extension. Any projects started in 2022 would have only qualified for a 10% tax credit, with residential projects being excluded entirely.
However, the solar tax credit extension passed in late 2020 provided a two-year extension on the ITC and a funding increase for energy research and development. Then, the Inflation Reduction Act of 2022 increased the Residential Clean Energy credit to 30%, extending through the end of 2032.
Now that the solar tax credit isn’t stepping down until 2033, you will still be able to claim the full value of the credit as long as you start construction before the end of 2032. How exciting is that?
At EMT Solar & Roofing, we’re about making solar simple! Get answers to some frequently asked questions about the solar panel installation process, benefits, costs and more! Contact us with any other questions and get started with a free quote for your solar or roofing services.
What is a tax credit?
A tax credit refers to a direct deduction from your income tax liability, where each dollar of the credit reduces the amount of tax owed by an equal amount. Let’s consider an example: if you claim a federal tax credit worth $1,000, your federal income tax due will be reduced by $1,000. It’s important to note that while the federal tax credit is occasionally known as an Investment Tax Credit (ITC), it should not be confused with the ITC provided to businesses that possess solar systems.
How do I qualify for the solar ITC?
To be eligible for the ITC tax credit, you must meet the following criteria:
- Your solar PV system must have been installed between January 1, 2017, and December 31, 2034.
- The solar PV system should be located at your residential property within the United States.
a. You must be the owner of the solar PV system, meaning you purchased it outright with cash or through financing. It should be noted that you are not eligible if you are leasing the system or if a solar company is purchasing the electricity generated by the system.
b. Alternatively, if you have acquired an interest in an off-site community solar project, you may qualify for the tax credit. However, this is subject to certain conditions. The electricity generated by the project should be credited against and should not exceed your home’s electricity consumption. Please note that the IRS issued a statement granting a specific taxpayer the ability to claim a tax credit for such a purchase. However, this statement, known as a private letter ruling or PLR, should not be relied upon as a precedent by other taxpayers. Additionally, purchasing electricity from a community solar project alone does not make you eligible for the tax credit.
4. The solar PV system must be new or utilized for the first time. The tax credit can only be claimed for the “original installation” of the solar equipment.
Can I claim credit, assuming I meet all requirements, if:
If I am not a homeowner?
Yes. You don’t need to be a homeowner to claim the tax credit. If you are a tenant-stockholder in a cooperative housing corporation or a member of a condominium, you may still be eligible for the tax credit if you contribute to the costs of an eligible solar PV system. In such cases, the amount you contribute towards the system’s cost would be used to calculate your tax credit. However, if you are a renter and your landlord installs a solar system, you cannot claim the tax credit since you must be the owner of the system to be eligible.
If I installed solar PV on my vacation home in the United States?
Yes. You can claim the tax credit even if you installed solar PV on your vacation home. However, please note that the residential federal solar tax credit cannot be claimed if you install a solar PV system on a rental unit that you own. The system may be eligible for the business Investment Tax Credit (ITC) under IRC Section 48 in such cases. The eligibility criteria specify that the 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.”
If I am not connected to the electric grid?
Yes. You can still claim the residential federal solar tax credit even if your solar PV system is not connected to the electric grid. As long as the system generates electricity for use at your residence, you meet the eligibility requirements.
If the solar PV panels are on my property but not on my roof?
Yes. The solar PV panels on your property do not have to be installed on your roof specifically. As long as they generate electricity for use at your residence, you can claim the tax credit.
If I have a home office (or my residence is also used for a commercial purpose)?
Yes. You can claim the tax credit, but it may be more complex if your residence serves multiple purposes. If the majority of the solar PV system’s cost is attributed to residential use rather than business use, you can claim the residential tax credit without complications. However, if less than 80% of the system cost is considered a residential expense, only the percentage representing residential spending can be used to calculate the federal solar tax credit on your individual tax return. The portion considered a business expense may be eligible for a separate commercial ITC on the business’s tax return.
If I financed my solar PV system instead of paying for it upfront?
Yes. If you financed the system through the seller and have a contractual obligation to pay the full cost, you can claim the federal solar tax credit based on the total system cost. However, miscellaneous expenses like financing interest, origination fees, and extended warranty expenses are not eligible for the tax credit calculation.
If I bought solar panels but have not installed them yet?
No. The tax credit can only be claimed for systems that have been fully installed during the tax year. Purchasing solar panels without installation does not qualify for the credit.
If I participate in an off-site community solar program?
The answer depends heavily on your specific circumstances. The eligibility for the tax credit in off-site community solar programs depends on specific circumstances. According to the IRS, off-site solar panels or panels not directly installed on your home may still qualify for the residential federal solar tax credit under certain conditions. However, community solar programs can have various structures, and claiming the tax credit may be challenging due to other tax rules.
For instance, some community solar programs involve the creation of a “special purpose entity,” where community members form and invest in a business that operates the solar project. If your participation is limited to investing in the community solar project without regular, continuous, and substantial involvement in its operation, you are considered a “passive investor.” In such cases, IRS rules state that a tax credit associated with a passive investment can only be used against passive income tax
How do other incentives I receive affect the federal tax credit?
For the most up-to-date information regarding incentives and their specific contact details, please visit the Database of State Incentives for Renewables and Efficiency website.
Rebate from my electric utility to install solar
In general, subsidies provided by your utility to assist with the installation of a solar PV system are excluded from income taxes under a federal law exemption. When this exemption applies, the utility rebate for installing solar is subtracted from your system costs before calculating your tax credit. Here’s an example: If your solar PV system, installed in 2022, costs $18,000 and your utility provides a one-time rebate of $1,000, your tax credit would be calculated as follows:
($18,000 – $1,000) * 0.30 = $5,100
However, payments from a public utility that compensate for excess electricity generated but not consumed by the taxpayer (such as net metering credits) are not considered subsidies for qualifying property installation. These payments do not impact your eligibility or the amount of your tax credit.
Payment for renewable energy certificates
If your utility or another buyer gives you cash or incentives in exchange for renewable energy certificates or other environmental attributes of the generated electricity (either upfront or over time), the payment is likely considered taxable income. While this payment increases your gross income, it does not reduce the federal solar tax credit. Please note that private letter rulings cannot be relied upon as precedent by other taxpayers.
Rebate from my state government
Unlike utility rebates, rebates from state governments generally do not reduce your federal tax credit. For instance, if your solar PV system was installed in 2022 and the installation costs amounted to $18,000, while your state government provided a one-time rebate of $1,000, your federal tax credit would be calculated as follows:
$18,000 * 0.30 = $5,400
State Tax Credit
State tax credits for solar PV installations generally do not reduce federal tax credits, and vice versa. However, when you receive a state tax credit, the taxable income reported on your federal taxes may be higher because you have less state income tax to deduct. It’s important to note that the Tax Cuts and Jobs Act of 2017 implemented a $10,000 limit on state and local tax (SALT) deductions until 2025. Therefore, if your SALT payments exceed $10,000 even after claiming a state tax credit, the state tax credit benefit would not be effectively reduced by the federal tax rate since it would not impact federal taxes due to the SALT limit. Claiming a state tax credit effectively means that the amount of the state tax credit is taxed at the federal tax level.
If the tax credit exceeds my tax liability, will I get a refund?
This tax credit is non-refundable, meaning that if the amount of the tax credit exceeds your tax liability, you will not receive a tax refund for the excess. However, homeowners may be eligible for a tax refund if the reduction in tax liability results in an overpayment throughout the year. This typically happens when employers deduct taxes from employees’ paychecks throughout the year. It’s important to note that any refund is still subject to the taxpayer’s total tax liability. Additionally, any unused portion of the tax credit can be carried over to the following tax year.
Is the cost of a roof replacement eligible for a tax credit?
In some cases, traditional roof materials and structural components that solely serve roofing or structural purposes are not eligible for credit. However, certain solar roofing tiles and solar roofing shingles that fulfill both solar electric generation and structural support functions may qualify for the credit. It’s important to note that the eligibility criteria may be subject to change based on further guidance provided by the Treasury Department.
I bought a new house that was constructed in 2022, but I did not move until 2023. Can I claim a tax credit if it came with Solar PV already installed?
Yes. In most cases, you can claim a tax credit for the expenses associated with the newly installed solar PV system in the year you move into the house, provided that the builder did not already claim the tax credit. This means you can potentially claim the credit in 2023. To calculate your tax credit, you can request the builder to make a reasonable allocation of these costs specifically for the purpose of claiming the tax credit.
How do I claim the federal solar tax credit?
Where can I find more information on the solar tax credit?
Here is a comprehensive list of other solar tax credit resources:
- View SETO’s other federal solar tax credit resources.
- The federal statute and IRS guidance: 26 USC § 25D at www.gpo.gov and “Q&A on Tax Credits for Sections 25C and 25D” at 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” at www.dsireusa.org.
- The U.S. Department of Energy (DOE) Solar Energy Technologies Office (SETO) held a webinar on September 27, 2022, to discuss the recent policy changes in the Inflation Reduction Act. Watch the recording, download the slides, and read the Q&A.
- Download a PDF version of this webpage: Guide to Federal Tax Credit for Residential Solar Photovoltaics.
- Read the Homeowner’s Guide to Going Solar.
Start Saving Immediately with EMT Solar & Roofing
Making the switch to solar energy is a long-term investment in reducing your household energy bills and helping the planet. Lower your carbon footprint, improve your home’s curb appeal, and enjoy a significant return on your investment.
If you’re looking for professional solar panel installation in New Jersey, consider beginning your project soon. With the Inflation Reduction Act now law, it has never been a better time to install a solar system on your property.
To learn more about installing your solar system with EMT Solar & Roofing, get your free quote now.