When Congress introduced the Solar Energy Tax Credit in 2005, it was designed to revive the then abandoned U.S. solar industry by lowering the price of solar energy for homeowners and businesses.
Since then, the tax credit has been a great success. Congress has tripled them (in 2006, 2008 and 2016), and by 2019 the solar industry will have installed a total of 69 GW of solar energy – enough to power about 9.8 million homes.
As installation costs continue to decrease as a result of cheaper technology and improved installation processes, federal tax credits, solar energy incentives such as tax breaks and utility rebates are decreasing. Unless Congress decides to extend it at the last moment, the federal tax credit will expire at the end of 2019.
But it’s not too late. Until the end of 2021, you can still benefit from this decisive solar stimulus. Here you will find everything you need to know about the federal tax on solar energy.
How does a tax credit for solar energy work?
A solar energy tax credit, officially known as Investment Tax Credit or ITC, is a loan for your federal income tax to install a solar energy system in your home. As a tax credit it offers – in contrast to a tax deduction – a reduction of the annual income tax in dollars against the dollar.
Homeowners and businesses are eligible for a loan, which from 2019 still represents 30% of the total cost of your solar energy system, without a maximum amount. For example, if you have installed an average solar system that costs approximately $21,000, you can receive a tax credit of $6,300, making your total solar investment as low as $14,700.
The tax credit is intended to help homeowners understand what it costs to purchase an expensive solar system and it does a great job. The tax credit can shorten the repayment period by four years or more, depending on energy consumption and costs.
This is an important point: Tax credit for solar energy Non-repayable appropriation. For example, if this tax refund reduces your tax liability to less than $0 for a year, the IRS will not refund you. However, if you don’t have to pay enough taxes to get the whole loan for one year, you can split the total cost and benefit from sharing it in a few years.
If you have a limited income, contact your tax officer to ensure that you can take full advantage of this great incentive. Solar panel installers are happy to include a tax reduction in their offer, but do not assume that you can take out the entire loan if you have a small income.
The tax credit for solar energy helps to repay
Since you are entitled to a tax reduction during the tax period immediately following your installation, this does not really reduce your initial purchase price. However, it still means a significant reduction in the total cost of your installation and also shortens payback time.
To understand the real strength of a solar tax credit, let’s look at the savings over the lifetime of an average solar system in Nevada, with or without a tax credit:
Suppose you install a 7,000-watt solar power plant in your pocket for $21,000. In Nevada solar power plant it is estimated that a 7,000 W solar power plant will produce 275,000 kWh over a life span of 25 years.
The average utility tariff in Nevada is $0.12 per kWh and increases these prices by 1.7% per year. For example, if you buy 275,000 kWh of electricity over the next 25 years (the same amount of electricity your solar system produces), you will spend $40,385.
For example, with solar panels on your roof you save $19,384 and it will take 14 years for your investment to pay for itself. Good yield, but fourteen years is a long time. Let’s add a solar energy tax credit and see what happens
A 30% federal tax surcharge increases the total cost of your installation from $21,000 to $14,700. Total life saving is increased to $25,684 and your return on investment is reduced to less than 10 years.
By simply claiming a federal tax credit, you reduced your return by four years and added $6,000 to your lifelong solar savings.
Roof and battery replacement can also take advantage of asolar tax credit.
The solar energy tax rebate can also cover replacement roofs and even energy storage systems (such as the Tesla Powerwall), , as long as these costs are directly related to thesolar system.
Let’s start with the roof. The question is how exactly the costs of the roof can be covered by the federal solar tax. Tax form 5695 says Costs relating to the solar panel or other object installed as a roof (or part of a roof) are not recognised simply because the object is a structural element of the structure on which it is installed.
This statement is very vague and depends on who you ask for the exact price of your roof. Installers agree that if you need structural improvements to make your roof safe for solar panels, 100% of these costs are eligible for a solar energy tax credit.
If your shingles are worn or damaged, some solar installers also recommend that you take out a tax credit on the total cost of installing new shingles. Other installers recommend to claim a tax credit only on the roof of the area directly under the solar panels. Others recommend not to claim overlap.
Finally, you are probably sure that you can claim part of the cost of covering the area directly under your solar panels. However, it should not be forgotten that (and Earthtechling) solar systems are notcontrol specialists. Consult a tax adviser before you declare your expenditure on solar energy.
With regard to battery systems, the IRS does not explicitly state that energy storage systems are eligible for a reduction in taxation on solar energy. A stand-alone battery system is therefore not entitled to a tax refund.
However, if you install a battery system – such as the Tesla Powerwall or the LG Chem RESU battery installed by Sunrun – with solar panels, the total cost of the battery system is tax deductible. This way, as long as the battery system is connected to the solar system, you can claim the full cost of the energy storage system.
The tax credit for solar energy expires in 2020.
The appropriation for solar energy will be gradually reduced from 2020 onwards. For example, the loan will change in the coming years and how this change will affect the costs of an average solar system.
|The level of the federal tax on solar energy||Availability||Credit costs for a $21,000 facility||Final installation costs|
|No credit||as of 2022||$0||$21,000|
The solar energy tax credit should help homeowners and businesses to avoid the high costs associated with the purchase of a solar energy system. The idea – used by many countries for their own solar irons – is to help the solar industry grow and mature, which will result in lower costs. When these costs fall and more owners are able to bear the full cost of the facilities, the incentives disappear again.
Government tax incentives are also available
In addition to federal income tax, many states offer their own tax benefits for solar systems.
Beginning in 2019, 7 states will provide tax benefits to individuals for residential solar energy systems, including
- Arizona: 25% of the installation costs, max. USD 1,000
- Hawaii: 35% of the installation costs, max. Five thousand dollars
- Iowa: 15% of the installation costs, max. USD 5000
- Massachusetts: 15% of the installation cost, max. USD 1,000
- Installation: 100% of the installation costs, max. USD 1,000
- New York: 25% of the installation costs, max. $5.000
- Utah: 25%, up to $1,200 to 2020 (in increments up to $800 to 2021, up to $400 to 2021)
If you are entitled to more than one solar tax credit and are concerned that one may affect the value of the other, there is no need to worry.
Federal and state taxes on solar energy are based on the cost of the installation – in other words, on the amount you paid for the installation. If you have received direct discounts from your city or utilities that immediately reduced the cost of your installation when purchasing, these discounts will affect your tax credit by reducing the amount of your credit.
Tax credits, on the other hand, generally do not affect the amount of the other tax credits you receive, as you only claim them a few months after you have placed your signs. However, the rules in your country may differ, so please contact your installer before you start.
Who is entitled to a tax credit?
Directly: All homeowners who buy and install a solar energy system on their home are eligible for a solar energy tax credit.
However, there are a few important points you should consider in order to get a tax credit for yourself:
- They can be installed on mobile homes, boats or even on site. It is not necessary to live in a detached house to benefit from this exceptional tax credit. Even if you live in a condominium, a mobile home or even on a boat, you are entitled to a tax credit on solar energy. And if you can’t install panels on the roof, you can install a floor system on site.
- The house does not have to be your main residence. You cannot claim a tax credit for renting property, but if you have a second home that you rent for part of the year, you can apply for a loan for the time you live in the home. If, for example, you install solar panels on your summer house or second home, the system is still eligible for a tax credit on solar energy.
- The tax credit is granted to the owner of the solar installation. If you bought your solar system in cash or on credit, you are immediately entitled to a tax credit. If you have financed your system through a power lease or purchase agreement (usually called a power purchase agreement), your solar company is eligible for a loan because it owns the system.
- You can apply for credit more than once. Suppose you have already installed a solar panel and taken advantage of the benefits of the solar load, but now you want to expand your installation and add more solar panels. The costs of purchasing and installing these additional modules are eligible for a tax credit on solar energy. Of course, you cannot claim an additional tax deduction for the part of the system that already exists.
How do I get a tax refund?
While your installer will help you fill in and submit applications to your accounting and grid connection company, it is up to you to apply for the solar energy tax credit.
This tax deduction, although some installers have decided to call it an immediate reduction, does not immediately lead to a reduction in the installation price. As with any other tax deduction, you apply for it during the tax period as soon as the system is installed.
To claim a tax deduction, fill in form 5695. If you plan to suspend the loan for several years, you will actually use the same form.
Don’t forget that as a non-refundable loan, you will never really own your tax credit – it can only lead to a reduction in your tax liabilities. However, this is a major reduction in your overall investment in solar energy, and you should consider setting up a solar-powered loan that can cover up to 26% of the term of the loan until the end of 2020.
Image source: Public space above Pixabay
solar investment tax credit,itc tax credit
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