What is the Federal Solar Tax Credit?
It is tax time so whether you are loving or hating Uncle Sam, it is a good time to highlight the Federal Solar Tax Credit. Converting a home to solar electricity has enormous savings and environmental benefits. And the 30% Federal Solar Tax credit only sweetens the deal. When you look into solar for your home here are 5 tips about the solar tax credit that everyone should know.
(This is general information only, please consult with a tax professional before making any tax credit related decisions.)
1. Solar Tax Credit is only available when the solar power installation is purchased
To claim the 30% solar tax credit, the solar power system must be purchased. The IRS is clear that any portion paid using subsidized energy financing, (i.e leases or power purchase agreements, PPAs) cannot be used to figure energy property credit. Solar Leases and Solar PPAs are considered subsidized energy financing, and they get the tax credit because they retain ownership of that solar power system.
When researching home solar power and considering solar financing options, be sure to review all options including cash, loans (private and HELOC), and other lines of credit. Viewing multiple option and their tax credit implications is the best way to discover how the tax credit will help yield the best price and long-term savings.
2. Calculate the 30% Solar Tax Credit from Net System Price
The solar tax credit is calculated as 30 percent from the net system price. The net price is the purchase price for equipment and labor after any rebates, discounts, promotions, or other state incentives have been deducted. As with most tax credits, the IRS does not allow double-dipping.
Here is an example to show net price calculation:
- Gross price ex: $20,000
- Less local rebate: $600
- Less installer promotion: $500
Net solar price to report to the IRS: $18,900
For specific IRS guidance on the renewable energy tax credit see Form 5659, Residential Energy Credit.
(Talk to a tax professional about tax credit implications on your tax return)
3. The Solar Power Approval Date Determines The Tax Credit Year
The solar tax credit can be claimed for the tax year that the system is installed and approved to operate. To be safe, it is best to use the date that the utility interconnection occurs, not just the date the installation finishes. The interconnection inspection by the utility authorizes the system to be turned on and start generating electricity.
The IRS language is slightly unclear, but after 30 years in the solar business we have learned to be conservative on this date. This question typically arises when solar projects start later in the year (think September/October). Due to several factors like permitting, weather and scheduling, projects can be unintentionally delayed during winter months. Get ahead of weather and potential delays, and start research and solar bids in the spring and summer.
4. The IRS Allows Carryover on the Solar Tax Credit
In the event that a homeowner does not have the tax appetite to redeem the full 30 percent tax credit in a single calendar year, the IRS, as of 2014, allows a carryover in order to help tax payer monetize as much of the solar tax credit as possible. (Talk to a tax professional about tax credit implications on your tax return.)
5. The Solar Tax Credit is Available Through 2019
The 30%, uncapped solar tax credit was passed as part of the 2009 American Recovery and Reinvestment Act. Recently Congress has agreed to extend the solar ITC at the current 30% rate through 2019, after which it will fall to 26% in 2020, 22% in 2021 and 10% in 2022.
Check out a Scientific American article post providing a general forecast about the future of the solar tax credit: https://www.scientificamerican.com/article/renewables-boom-expected-thanks-to-tax-credit/