What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe to the federal government. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000.
The Solar Investment Tax Credit, or ITC
The tax credit for residential solar is a great federal incentive program designed to encourage the adoption of solar energy by homeowners. Under this program, homeowners who install solar panels on their homes are eligible to receive a tax credit equal to 30% of the total cost of the solar/battery installation project, with no maximum limit.
So, you can claim a $9,000 credit on a $30,000 solar system or a $18,000 credit on a $60,000 system!
As long as you own your solar energy system, you are eligible for the solar investment tax credit. To claim the tax credit, homeowners simply need to file IRS Form 5695 with their tax return, along with any other relevant tax forms. The credit can be applied to both the federal income tax and the alternative minimum tax, and any excess credit can be carried forward to future tax years. However, remember that if you sign a lease or power purchase agreement (PPA) with a solar installer, you are not the owner of the system, and therefore cannot claim the tax credit. Lastly, it’s important to note that there is no income limit on the ITC program, so taxpayers in all income brackets may be eligible.
Is a roof eligible for the residential energy efficient property tax credit?
Unfortunately, typical costs to replace or upgrade your roof before going solar do not count for the ITC, and there is language specifically carving this out in the IRS guidance. In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles (“building integrated solar” such as solar shingles) serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof’s decking or rafters that serve only a roofing or structural function do not qualify for the credit.
When would I receive the tax credit?
You’ll receive the tax credit the tax filing season after the year you install your system and complete your project. If your project is installed in October 2022, you’d be receiving your tax credit approximately in April 2023, as an example.
Can I incorporate the solar tax credit into my financing so I don’t have to pay up-front and float the 30%?
Nearly all solar lenders provide 100% project financing and then anticipate in the repayment schedule a month 12 or month 18 repayment equal to 30% of the project cost (equal to the expected ITC amount). This is often referred to in the industry as a “solar style loan”. This is a great option because it facilitates projects where homeowners don’t have the cash available to invest in solar but want to proceed with their project.
History of the Solar Tax Credit
The federal solar investment tax credit — or “ITC” — was originally passed under the George Bush administration as part of the Energy Policy Act of 2005. The ITC was created to help promote and incentivize the adoption of clean energy in the United States. It started as a 30% credit, but was capped at $2,000 for residential projects. In 2008, that $2,000 cap was removed.
The ITC has since been reduced and extended several times since 2008. Most recently, in 2022, when the ITC credit amount was 26% and scheduled to go down to 22% for 2023, the signing of the Inflation Reduction Act raised it back to 30% where it will stay until Dec. 31, 2032. The credit will then drop to 26% in 2033, to 22% in 2034 and to 0% in 2035 and thereafter.
You can learn more about the Solar ITC and the Inflation Reduction Act on https://www.whitehouse.gov/cleanenergy/.
The Impact of the Solar ITC
Thanks to the ITC, the growth of the solar industry helped create hundreds of thousands of jobs, injected billions of dollars into the US economy, and was a significant step towards cutting down on greenhouse gases, so it was very popular. According to the Solar Energy Industries Association (SEIA), “The ITC has helped the U.S. solar industry grow by more than 10,000% percent since it was implemented in 2006.”
To learn more about the impact of the solar ITC, you can read more on the SEIA website.