History of the Federal Investment Tax Credit for Solar Power and how to claim it?
One of the first things homeowners in California and Hawaii ask us about when exploring solar is the solar tax credit. The Federal Investment Tax Credit (ITC), or federal solar tax credit, as it is sometimes called, provides homeowners with the ability to deduct 26 percent of the total cost of installing a solar energy system from their federal taxes.
The ITC applies to all homeowners who purchase a system, and the amount that can be deducted is not capped.
What is the history of the solar Investment Tax Credit?
The Investment Tax Credit was initially part of the Energy Policy Act of 2005 and was implemented to provide tax incentives to energy production to help the nation move forward more efficiently. Although it was designated to expire in 2007, the ITC's success inspired Congress to extend the credit.
Since its creation, the ITC has been extended multiple times. In its current form, the solar Investment Tax Credit will be available to homeowners until 2023. Initially, the Federal Solar Tax Credit was expected to step down in 2021 and go away entirely for homeowners in 2022. After extensive negotiations, an ITC extension was built into the December 21, 2020, COVID relief bill.
2016 – 2019: The ITC is set at 30 percent of the cost of the system.
2020-2022: Owners of a new solar energy system can deduct 26 percent of the system's cost from their taxes.
2023: Owners of a new solar energy system can deduct 22 percent of the system's cost from their taxes.
2024 and beyond: There is no federal credit for residential solar energy systems but a 10% tax credit for commercial solar installations.
What is a tax credit?
When understanding how the ITC works, it is first essential to understand what a tax credit is and how it works. A tax credit is a dollar-for-dollar reduction in the quantity of income tax that a homeowner is responsible for. As a simple example, a $500 federal tax credit reduces a homeowner's federal income taxes by $500.
How does the Investment Tax Credit (ITC) work for homeowners?
If a homeowner purchases their solar system (either through finance or cash), they are eligible for the solar Investment Tax Credit. Not everyone can use the full tax credit in year one if they do not have sufficient tax liability. The ITC is designed to take this into effect and allows homeowners to "roll over" the remaining credits into future years until the entire tax credit has even been utilized.
What are the requirements for claiming the Solar Federal Tax Credit?
1) The solar PV system needs to be installed between January 1, 2006, and December 31, 2023 (as mentioned above, the credit amount will decrease depending on the year of the install).
2) The solar panel system needs to be installed at a US home, either a homeowner's primary or secondary residence
3) The ITC is only available to homeowners who purchase the solar PV system (i.e., you purchased it with cash or through financing) Leasing the system or a power purchase agreement for the solar electricity does not quality the homeowner for an ITC.
4) The solar PV system is new or being used for the first time. The credit can only be claimed on the "original installation" of the solar equipment.
When does a solar system need to be installed to qualify for the federal solar tax credit?
To take advantage of the ITC, the solar system must be placed into service during the tax year and produce electricity for a home located in the United States.
Solar companies tell customers different things about what the IRS defines as "placed in service." The misinformation can lead to confusion and issues for homeowners, but the IRS clarified that "placed in service" means a completed installation.
Can homeowners who finance their solar system qualify for the ITC?
For homeowners looking to own a solar system using solar financing, they will still qualify for the solar tax credit.
The tax credit amount will be based on the full system cost. Additional expenses like interest owed on the financing are not eligible for inclusion when calculating the tax credit.
Solar financing can come in many different forms. It is important to understand that homeowners who chose a solar lease or Power Purchase Agreement cannot use the ITC because the ITC is used by the lease or PPA provider to help offer the lowest payment possible.
Do solar panels have to be installed on a roof or home to qualify for the ITC?
Solar panels do not have to be located on a customer's house to qualify for the ITC, the solar panels need to be used to power the home. That means that ground-mounted systems or solar panels mounted on other structures can still qualify as long as the panels are used to power a home.
How much does the average Federal Solar Tax Credit save homeowners?
The Investment Tax Credit saves our customers, on average, around $5,720, providing a massive financial benefit for installing solar energy systems.
The amount will be different for each homeowner based on the system's size, the equipment, installation type, and make-up of a home's roof.
What costs are included under the ITC?
When Alchemy Solar provides a system cost to a homeowner, the customer will be able to deduct that 26% of that cost as the tax credit. Let's break down all the inputs associated with the cost provided to fully understand what is applicable for the tax credit.
The solar PV panels and all the other balance of system equipment are included. The system equipment balance includes the panel racking, penetrations, wiring, conduit, and solar inverters.
The labor costs associated with the site survey, installation, and project execution are all included. The costs for permits, inspections, and developer fees are all included in addition to the installation costs.
Finally, if sales taxes are applicable, it is also an eligible expense.
Do solar batteries qualify for the Federal Solar Tax Credit?
As long as the energy storage device is entirely charged from solar PV panels, the home solar battery will qualify for the federal tax credit.
This tax credit can massively improve the economics of home solar batteries. As a company that can provide Sunrun solutions, the ITC is one reason Sunrun can provide $0 down battery solutions with its Brightbox product.
Can homeowners who have a home office use the federal solar tax credit?
As a result of the Covid-Pandemic, many people have transitioned to working from home, with many people adding a home office. The transition to a home having multiple purposes can add some complexity to how customers who add a solar system claim the tax credit.
When the amount spent on the solar panel system is primarily used for residential electrical usage instead of business purposes, the customer can claim the full residential credit without any additional challenges.
If less than 80% of the solar PV system's electricity is used to cover the residential electrical usage, the percentage of the solar power electricity used to power the home's residential electricity usage can be claimed for the federal solar ITC.
The remaining percentage of the solar system used for the business expenses is eligible for the commercial ITC on the business's tax return.
Do other incentives impact my ability to claim the Federal Solar Tax Credit?
Many states and utilities have incentives to help make solar and energy storage more affordable. Many utilities have Net Energy Metering policies or even NEM 2.0 like the San Diego Gas and Electric (SDG&E), Southern California Edison (SCE), and Pacific Gas and Electric (PG&E). Some states, like New York, offer a state solar tax credit. Some regions of the country are even starting to offer battery-specific rebates like California's Self Generation Incentive Program (SGIP).
One of the great things about the Federal ITC is that the tax credit is based on the total amount of the solar agreement and not the amount after any additional rebates or incentives. That helps to maximize the potential savings that a homeowner can experience.
How do homeowners claim the solar tax credit?
Homeowners claim the solar tax credit on their system on their yearly federal tax returns. If a homeowner works with a tax professional or accountant, the homeowner should make sure that the accountant knows they went solar the previous year. If a homeowner files their own taxes, they should be proactive about educating themselves about how the residential ITC works.
After seeking professional tax advice and confirming that the homeowner is eligible to take advantage of the federal solar tax credit, the homeowner should fill out and attach IRS Form 569516 to the federal tax return (Form 1040 or Form 1040NR). If you are a homeowner interested in reviewing the form or need to find it for your filling, it can be found on the IRS Website ("Instructions for Form 5695," IRS).
If you have questions about how the ITC works, please schedule a free consultation with Alchemy Solar today.