Disclaimer: The purpose of this essay is to give prospective homeowners with an understanding of the Federal Solar Tax Credit. It is not meant to be used as formal financial advice. Before making any purchase or investment in solar equipment, readers should exercise their best judgment and obtain guidance from a competent specialist.
The ITC was created by the Energy Policy Act of 2005 and was expected to expire at the end of 2007. Because of the ITC's popularity and performance in assisting the United States' transition to a renewable energy economy, Congress has repeatedly extended its energy efficient tax credit expiry date, most recently in December 2020 to prolong the ITC at 26 percent for two extra years. Homeowners may now take advantage of the solar investment tax credit in some manner until 2021. Here are the details:
2016 – 2019: The tax credit continues at 30% of the system's cost.
From 2020 to 2022, owners of new residential and commercial solar systems may deduct 26 percent of the system's cost from their taxes.
In 2023, owners of new residential and commercial solar systems will be able to deduct 22 percent of the system's cost from their taxes.
In 2024, owners of new commercial solar energy systems will be able to deduct 10% of the system's cost from their taxes. Residential solar energy systems do not qualify for a federal tax credit.
What is the solar tax credit and how does it work?
The solar investment tax credit is available as long as you own your solar energy system. Even if you don't have enough tax liabilities to claim the whole credit in a single year, you may "roll over" the leftover credits into future years for as long as the tax credit is available.
However, keep in mind that if you sign a lease or power purchase agreement (PPA) with a solar installation, you will not be the owner of the system and so will not be able to claim the tax credit. Finally, there is no income restriction for the ITC scheme, thus taxpayers in all income groups may be eligible.
What does the tax credit cover?
Homeowners that take advantage of the 26 percent ITC may expect to have the following expenses covered:
- The price of solar panels
- Installation labor expenses, including permit fees, inspection fees, and developer fees
- Any extra solar equipment, such as inverters, wiring, or mounting hardware
- Your solar equipment charges your home batteries.
- Sales taxes on qualified costs
When and how long am I able to collect the solar tax credit?
If you are qualified for the ITC but do not owe any taxes during the calendar year, the IRS will not issue you a check for the credit. The ITC of 26 percent is not refundable. However, the ITC may be carried back one year and forward 20 years under Section 48 of the Internal Revenue Code. As a result, even if you had a tax burden last year but none this year, you may still claim the credit when you file taxes. Similarly, if you had no tax duty last year or this year, you may utilize the credit whenever you have responsibility in the future 20 years.