Federal Solar Tax Credits

Curious about solar tax credits and how they work? We can go over that with you. Our U.S. federal tax code provides access to two main solar tax credits. These tax credits may seem similar but they differ depending on your situation. The first one is called the federal solar Investment Tax Credit (ITC). This tax credit is for businesses and is important because it can help make residential solar more affordable to more homeowners in more places. The second tax credit is called the Residential Federal Solar Tax Credit. That credit is available to individuals who install solar on a first or second residence (excluding rental properties).

As part of the COVID-19 relief package, the federal government has extended the due dates for both Federal Solar Tax Credits. So you are aware, interested residents tend to refer to both federal credits as "ITC." This is because the two credits give a similar tax benefit. It’s important to be aware of this and not confuse the two. Only the business credit is the true ITC. We feel it necessary to point this out because there are some important differences between the things you are able to claim under either credit, when they can be claimed, and an entire legal precedent for how the IRS treats the credits separately.

For the purposes of this article, we’re going to hone in on the characteristics of the Residential Federal Solar Tax Credit for individual taxpayers because that’s the tax credit most applicable to homeowners. We’re going to explain what it is, how it works, what has changed about it, who is eligible to receive it, what you can claim to get it, how long you have to take advantage of it, when you can claim it, and where you can find more information about it. Let’s get started.

TaxCreditSavingsArticle

What are federal solar tax credits?

The Residential Federal Solar Tax Credit (IRC § 25) is a credit you may be eligible to receive for going solar. The credit gives solar energy system owners (owners is an important distinction) a dollar-for-dollar reduction against their federal income taxes.

How does federal solar tax credits work?

The percentage that solar owners may have received differed based on when their solar energy system was installed and operable. If your solar energy system was installed and working before December 31, 2019, then you may have been able to qualify for a 30 percent tax credit. After 2019, that percentage dropped to 26 percent and the installation/operation deadline for your system was December 31, 2020. After that, the percentage dropped to 22 percent with an installation/operation deadline of December 31, 2021. Note, the COVID-19 relief package signed into law at the end of 2020 changed this timing.

Here’s how federal solar tax credits broke out before the change:
  • 30 percent for systems in service by 12/31/2019
  • 26 percent for systems in service on or after 1/1/2020 but before 12/31/2020
  • 22 percent for systems in service on or after 1/1/2021 but before 12/31/2021
Past Federal Solar Tax Credit Schedule

How have federal solar tax credits changed?

Thanks to the COVID-19 relief package, the federal government has opted to extend the credit by two years. That means that owners of solar energy systems can receive the 26 percent tax credit as long as their system is installed and operational on or before December 31, 2022. Though the deadline for the 30% credit didn’t change (12/31/2019), you can still qualify for the second highest percentage rebate tier.

Here’s how federal solar tax credits break out now:
  • 30 percent for systems in service by 12/31/2019
  • 26 percent for systems in service after 1/1/2020 but before 12/31/2022 (2-year extension)
  • 22 percent for systems in service on or after 1/1/2023 but before 12/31/2023
New Federal Tax Credit Schedule

Who is eligible to receive federal solar tax credits?

Anyone who owns a solar energy system.

Ownership is key. For you solar energy owners, that’s anyone who signed a Purchase Agreement or Loan Agreement. You may be eligible for the tax credit because you own the system. Sidenote: the Residential Solar Tax Credit only applies to first or second residential properties—not rental properties.

If we installed the solar energy system on your home, but you do not own the equipment yourself, you will not be eligible for the credit. This mainly applies to homeowners who signed a PPA Agreement or Lease Agreement. Because we still own the solar energy system, we claim the solar tax credits for businesses. However, this can still benefit you because our adoption of the tax credit means we can offer the benefits of solar at a lower cost to you. The great rates we give for going solar make doing so an easily attainable dream for so many of our customers who may not be interested in buying their solar energy system outright.

What can I claim in order to get federal solar tax credits?

That’s the nice part. There’s not much of the solar energy system you can’t claim in order to be eligible. The Residential Solar Tax Credit allows you to claim your solar panels, any additional solar equipment (inverter, boxes, panels, wiring, etc.), your solar battery, if you get one, and the cost of labor performed as part of the solar system installation process.

What is the timeframe to take advantage of federal solar tax credits?

Though we’ve already referenced the timeframe above, here is another way to break it down:

Residential federal tax credits for system installed

When can I claim federal solar tax credits?

Tax time. You may claim the residential solar tax credit when you file your income tax return for the applicable year. We strongly recommend consulting with a tax advisor. They will most likely have you fill out Form 5695 as part of your tax return for the applicable year.

Where can I get more information about federal solar tax credits?

We recommend going to energy.gov. They are credible and have a lot of solid details about solar tax credits and everything you need to know about them. We know this is repetitive, but we also recommend consulting a tax advisor. Most tax advisors will know your particular situation and be able to direct you on how to go about applying for and collecting your tax credit benefits.

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