This article answers the most commonly asked questions about eligibility for the Solar Investment Tax Credit (ITC). The ITC is a federal IRS program that will pay for 30% of your solar system, for the average homeowner this is nearly $10,000. There might never be a better time to go solar thanks to this solar incentive program, but be aware the program begins to phase out starting in 2020. The ITC has helped the residential and commercial solar industry become one of the fastest growing renewable energy sectors in the United States, a rare gift via the internal revenue service. Be aware, however, that when the solar investment tax credit begins to phase out, there will be a rush of homeowners wanting to go solar causing a backlog for all solar installers – and some people might get left out. Don’t hesitate.
What is the solar investment tax credit?
The ITC is a federal tax credit that allows you to deduct 30% of the cost of solar PV system (solar pv means photovoltaic, as opposed to other forms of solar such as solar thermal pool heating) from your federal taxes. This can include related costs such as roof work under the solar array or a home battery. For example, if your solar system and related expenses cost $30,000, you can claim the ITC and pay $9,000 less in taxes. Be aware that the full ITC is set to expire in the year 2021. It will reduce to 26% in the year 2020, 22% in 2021, then no longer available after 2021 for residential system owners (unless the program is renewed by the federal government). The ITC will continue for commercial and utility-scale solar and renewable energy projects beyond the year 2021, but permanently capped at 10%.
What kinds of solar panels are allowable under the tax code?
To qualify, the panels must be photovoltaic (PV electricity producing), not water heating such as pool thermal, or any other non-electricity producing panels. There are no restrictions on the brand, shape, size, age or any other limiting factors as long as they are photovoltaic panels. This can be significant especially for homeowners where solar systems cannot easily fit on their roof due to shading issues, or simply not enough square footage – sometimes the homeowner is faced with using smaller panels with higher electrical output. Panels such as these can be more expensive but knowing they are covered under the ITC can influence the homeowner’s decision to move forward.
Are both residential and commercial solar systems allowable under the tax code?
Both commercial and residential proposals are allowable under the tax code. As with residential, a business needs enough tax liability to take advantage of the federal solar tax credit. If the business does not have enough tax liability in the first year, they can apply the ITC to the next tax year, and next tax year after that as long as the federal solar tax credit program is in existence. There are no limitations on which solar contractor installs the energy system, there is no special certification or requirements on who does the physical work of the panel installation – you can actually install a system yourself and still qualify for the ITC. It is a good idea, however, to keep any paperwork generated by you or your solar contractor as valuable tax documentation for future reference. The ITC is one of the best tax incentives available for business solar, especially as businesses think of their renewable energy systems as long-term investments and need greater justification to spend the capital. Be aware that the ITC for commercial and business has a different schedule than for residential solar.
Will the ITC tax credit to cover the entire cost of a solar panel installation?
The ITC will not completely cover the installation of your solar panels, it is capped at 30% of the system cost (until the ITC percentage begins to reduce in 2020). The solar investment tax credit is meant to promote renewable energy and transition to a green economy – not fully pay for systems. But keep in mind the ITC also applies to the cost of energy storage (home batteries) systems when part of a solar power installation, and might be applicable even with a standalone energy storage system. The federal solar tax credit also applies to other costs of a solar installation, such as roof work and construction. Unfortunately there is virtually no possibility any taxpayer incentive will ever cover the full cost of solar energy systems.
Does the ITC count for solar panels installed on rental properties?
Yes. Whomever owns the solar panel system is eligible to claim the ITC, not necessarily who occupies the property. If you are a tenant and own the system, you can claim the ITC. If you are the property owner and own the system, you can claim the ITC, not your tenant. This applies to leased and PPA (power purchase agreement) systems as well; if you lease or enter into a PPA, you as the homeowner are unlikely to be eligible to claim the ITC – your lease or PPA company is likely to claim it for themselves. But don’t worry, Baker’s PPA and lease partners share the ITC by folding the savings into a reduced cost of the system. If you are a renter interested in going solar, it is highly advised that you speak to the property owner before moving forward. Some property owners are willing to share the costs if they feel it increases the value of the property.
What solar contractors qualify for the ITC?
It makes no difference to the IRS which solar contractor, construction company, or person installs your solar project in order to qualify for the ITC. Every solar installer should be an expert on the federal solar investment tax credit and be able to answer all your questions. Be wary of an solar contractor who appears reluctant or unwilling to answer your questions, it is possible they only sell a PPA or lease solar system and want to claim the ITC for themselves without you knowing. Ultimately, however, you should consult your own tax professional to know exactly what impact the ITC will have on your tax return. Not everyone has enough income tax or other tax liability in order to take advantage of the credit.
How do other solar incentives and rebates affect the ITC amount?
For the most part, the ITC is unaffected by other incentive and grant programs. However, you need to do your research. For example, if you are installing a home battery along with your solar system, you (and your tax professional) will need to know that home batteries are eligible for both the ITC and SGIP (self-generation incentive program) incentives, but the 30% ITC can only be claimed on the amount remaining after the SGIP amount has been deducted.
How does the solar investment tax credit work?
The way the solar investment tax credit works is simple; the federal government will cover 30% of the total cost of your solar system including eligible costs such as roof work, and even a home battery (minus SGIP). You will have a tax credit in this amount to be applied to your federal taxes for the year. For example, if the total cost of your solar system, roofing and battery are $30,000, you will have a tax credit of $10,000. If you owe $10,000 at the end of the year, you can use your tax credit to wipe this out. If you have a $10,000 ITC tax credit but only owe $5,000 at the end of the year, you can use just $5,000 of your $10,000 tax credit and apply the remainder any year in the future as long as the ITC program is still running.
Is the federal tax credit for solar panels refundable?
The federal tax credit for solar panels is not refundable. If you do not have the tax appetite or tax liability to use your ITC credit at the end of the year, it can be rolled over into future years for as long as the ITC program is in existence. It is suggested that you speak to your own tax professional about the federal investment tax credit as they will have more insight into your individual income tax and tax return. Although the ITC itself is simply to explain, every taxpayer has a slightly different tax liability. File your own taxes instead of using a tax professional? No problem, just make sure you understand fully what the IRS needs from you. Feel free to call us for more information, we’re happy to answer all your questions, even if you aren’t ready to move forward.
Is there an ITC on leased solar panels?
Yes, but it goes to the solar lease company that owns your system. In the case of a lease or PPA, the homeowner does not own the system. Baker’s lease and PPA partners share ITC with the customer by folding the savings into the monthly lease or PPA payment. This is not the case with all solar contractors, some are intentionally deceptive about collecting the ITC and prefer customers who are not educated enough to inquire about it. Be wary of companies who offer only a lease or PPA vs cash or finance as a strictly lease/PPA installer is more likely to pocket the ITC credit without being up-front about it.
How to claim the ITC on your taxes for solar energy?
You claim your solar investment tax credit when you file federal taxes at the end of the year. Notify your tax professional about your solar system, and do not forget to include related expenses such as roof work or a home battery. They will file your return with your ITC information. If you do not have a tax professional and handle your taxes on your own, it is recommended you do additional research to ensure you are submitting all the information required by the IRS and that you are submitting the right amount.
How much money can one get from rebates from the solar investment tax credit?
There is no cap or limit on the size of your ITC credit – but it will never be more than 30% of the cost of the system. For example, a homeowner with a $100,000 solar system will receive the same ITC percent as their neighbor with a $5,000 solar system. The solar investment tax credit can be applied to most, if not all, costs associated with your solar project, not just the panels; home battery, roof work, construction… Keep in mind the ITC drops from 30% to 26% in 2020, then 22% in 2021, and the program expires for residential owners after 2021. It is important you begin the process of going solar as soon as possible as there will be a rush on solar systems as we approach the ITC deadline as some homeowners do not get installed in time and miss the deadline.
How long will the solar investment tax credit last?
Until 2021 for residential system owners. The ITC drops from 30% to 26% in 2020, then 22% in 2021, and the program expires for residential owners after 2021.
Are there any notable limitations to the solar investment tax credit? If so, what are they?
There are no notable limitations on the ITC itself, the ITC simply credits you 30% of the total cost of your system including related costs such as roof work or a home energy storage battery. If you do not pay enough taxes to use your full credit by 2021, you may be limited in this way – but this scenario is highly unlikely.
How much do solar panels increase the value of your home?
A standard solar system of 5kW will increase the value of your home by $20,000 according to Energy Sage. After taking into consideration the ITC, this means a roughly dollar for dollar increase in the value of your home by adding solar.
If you are interested in going solar, the time to do it is now. Don’t wait for the ITC to expire, it is literally free money given to you in the form of a tax credit. Contact us to learn everything you need to know about the solar energy investment tax credit, we’re happy to answer all your questions.