Toggle navigation

Blog Details

Solar Tax Credit

Federal Solar Tax Credit: Everything You Need to Know

Posted on June 28, 2019 by David Green

What is the Solar Tax Credit?

The Investment tax credit (ITC) for solar power, also known as the federal solar tax credit is a US federal government strategy, originally established by the Energy Policy Act of 2005. This sovereign strategy allows a consumer to deduct 30 percent of the cost of installing a solar energy system from their federal taxes. There is no cap to the value of the system installed, and this subsidy applies to both residential and commercial solar system installations. Initially started in 2005, this scheme has now left its footprints in the US ideology of making renewable energy the primary source of power for homes and industries. Due to the wide acclamation that the Solar Tax Credits brought around the US, the government did an extension in its tenure till 2021. This Solar Tax Credits scheme was actually introduced in support of the United States’ action of transition to a renewable energy economy.

History and Opportunity of the Federal Solar Tax Credit

Like already mentioned, this government-aided scheme commenced in 2005, and was about to get over by 2007 but given by its productive and popular nature, Congress passed a multi-year extension of the ITC in 2015. For the present, the extension is till 2021. Let us have a look at the statistics of results that it brought:

  1. There is a 54% average annual solar growth since the ITC was enacted.
  2. The residential and commercial solar ITC has helped the US solar energy industry grow by more than 5,000 percent since its implementation.
  3. The 2015 extension of the ITC to 2021, has validated companies to develop long-term investments that drive competition and technological innovation, which in turn has lowered energy costs for consumers.
  4. The long-term stability of this federal policy has also allowed businesses to continue driving down costs. The ITC is a clear policy success story – one that has resulted in a stronger and cleaner economy.
  5. The federal solar tax credit is accredited, not a deduction, off total tax paid.

Solar Investment Tax Credit IRS – (Internal Revenue Services)

Federal Solar Tax Credits has now proven to be one of the most significant federal policy mechanisms to incentivize renewable energy in the United States. On June 22, 2018, the release of the Commence Construction Guidance by IRS took place, much awaited by all the Solar-installers. This manual sets forth the requirements for establishing the beginning of construction for solar energy projects.

  1. The 30% ITC is a non-refundable credit. However, one can use its value for up to 5 years after installing the solar panel system.
  2. The Investment Tax Credit is based on the amount of investment in a particular solar property. Both the residential and commercial scale consumers are eligible for the 30 percent ITC on the act of investing in projects which has begun construction through 2019. The Federal Solar Tax Credits works in this way:
      • 26% for projects that begin construction in 2020
      • 22% for projects that begin construction in 2021
      • After 2021, the residential credit drops to zero while the commercial credit drops to a permanent 10%
      • 2021- Homeowners and commercial solar system installation will benefit from a 22% deduction
      • 2022 onward- Only owners of new commercial solar system installation will benefit from a 10% reduction of the cost of installation
      • There are currently no federal tax credits for residential solar system installations from 2022 onward

You might want to lease your solar panels to save money. In that case, the leasing company is the one that qualifies for the 30% tax credit, not you. You can, however, buy your own solar panels by taking out a loan and enjoy the 30% tax credit yourself.

When filing your tax returns:

  • Confirm that you qualify for the 30% tax credit
  • Gather all the necessary receipts
  • Complete IRS Form 5965
  • Add the credit to Form 1040

You can actually consume in more than once in the scenario - You can do a 10 solar panel project on your house this year, and add another 10 panels next year. Both the purchases on your primary or secondary home would qualify for the 30% tax credit.

You can’t tell how much of a solar tax credit you can take by whether you pay or get a refund come tax time. Withholdings are taken from your check each pay period, and are used to pay your taxes all throughout the year, instead of one big check in April. So if you pay too much, you get some back. If your pay are not enough, you pay the difference in April.

The tax credit has been constructed in such a way that it instructs installers to have their system installed by the end of each tax year in order to take advantage of the credit

Do you qualify for the Federal Solar Tax Credit?

  1. Eligibility for the ITC is based on a “commence construction” standard. The IRS issued guidelines in June 2018 that explains the requirements taxpayers must meet to establish that construction of a solar facility has begun for purposes of claiming the ITC.
  2. There are two methods a taxpayer may use to establish that construction of a qualified solar facility has begun for purposes of claiming the solar investment tax credit (ITC). Both methods require a taxpayer to make continuous progress toward the completion of their solar project construction.
  3. To begin with the physical work of a significant nature (Physical Work Test)
  4. Meeting the so-called 5% Safe Harbour test (i.e., paying or incurring five percent or more of the total cost of the facility in the year that construction begins)
  •  

Key points to remember:

  1. Your solar system has to be installed by Dec. 31, 2019
  2. You must own and not rent the home or business that you want to outfit with the solar system-a rental property doesn’t qualify
  3. Commercial and utility-scale projects which have commenced construction before December 31, 2021 may still qualify for the scheme of 30% in 2026 or 22% ITC, if they are placed in service before December 31, 2023
  4. You are eligible for the Federal ITC as long as you own your solar energy system, rather than lease it
  5. Although in some special cases, a lease will grant you the financial benefits associated with the sale of solar renewable energy certificates (SRECs) 
  6. If you sign a lease agreement, the third-party owner gets the solar tax credit associated with the system
  7. You are also eligible even if the installation-property  is not  your primary residence – as long as you own the property and live in it for half the year, you can claim the solar tax credit
  8. If your federal tax liability is lower than the total amount of your ITC savings, you can still take advantage of it by carrying over any remaining credits to the following year
  9. Earlier, owners of new solar systems installers could not claim the tax credit unless their system was operational. Now, recent legislation allows homeowners to claim it as soon as the construction of the system commences, for now as long as the solar panel system is operational by December 31, 2023.

How to claim the Solar Tax Credit?

Owning your solar energy system makes you eligible for the solar investment tax credit. In some cases, you can “roll over” your remaining credits to the upcoming years for as long as the tax credit is effective. On grounds of you signing a lease or PPA with a solar installer, you are no longer the owner of the system, thus you cannot receive the tax credit.

When you are qualified for the solar tax credit, these are the things that you can claim when filing your tax returns:

  • Solar consulting fees
  • Solar equipment
  • Freight shipping costs
  • Tools and equipment
  • Professional installer fees
  • Engineer fees
  • Electrician fees
  • Wiring, screws, bolts, nails, etc.
  • Permitting service costs
  • Permitting fees

Benefits of Solar Tax Credits:

The Federal Government scheme is a matter of privilege to its natives and the environment, by providing this subsidy- Solar Tax Credit. According to the form 5695 instruction by the IRS, if your federal tax liability for the year 2018 is $4,500 only, you will owe no federal taxes that year, and in 2019, your tax liability will be reduced by $1,500.

In conclusion, we can point out that solar tax credits have made solar energy more affordable for many home and business owners and encourage people to buy their own solar panels.

At iSolarWorld, we provide our clients with a full range of consulting service around the solar energy space including the Federal Solar Tax Credits. Contact us at info@isolarworld.com to know more.