The solar tax credit not only offers tax subsidies but also ensures that homeowners cushion themselves from expensive utility bills. Most of home solar power systems (batteries and solar panels) are eligible for the federal investment tax credit (ITC). By installing solar systems, you can file with IRS and claim up to 30% tax credit.
What is Solar Tax Credit?
The tax credit is not like a deduction as it can be rolled over or used to pay off owed taxes. The 30% tax credit comes to an end on 31 December 2019, and that’s the reason you should take the advantage before 2020 as the tax credit will be reduced to 26%. In 2021 the residential solar tax credit will reduce to 22% and will get to zero by 2022. This tax credit is a one-time credit you receive the first year you install a solar panel system. The credit has no cap amount making it one of the most effective tax subsidies ever rolled by the federal government.
Implications to the Solar Industry
The solar tax credit is an unprecedented tax incentive meant to increase the adoption of green energy sources to reduce reliance on oil. It is likely that the solar industry will grow by huge margins in 2019 as homeowners seek to rush for the 30% credit.
It is crucial to mention that ITC extended the subsidy in 2016 to 2020 due to the increased demand for solar power and subsequent approval of the Consolidated Appropriations Act, 2016 by the Congress. The extension had a catalytic effect as the country has seen increased rooftop and utility-scale solar energy adoption across all states. The costs of installation are set to rise as the demand for installation services increases as the federal solar rebate program approaches the end of 2019.
How the Tax Credit Works
The process of acquiring the investment tax credit is straightforward. Your solar installation company will give you a receipt for the total cost of the system after completion of the installation process. Solar tax credits are claimed when filing annual federal tax returns. Once you get the receipt, you can give it to your accountant to update the tax information, or you can fill the Federal Solar Tax Credit Form (form 5965) when it’s time to file your tax returns. If you’re not able to get the full benefit of the tax credit on your first year, you can roll it over to subsequent years to reduce your tax burden.
When you install solar panels with storage batteries, you can include the storage costs to get a maximum tax credit. Also, if you’ve old solar panels and you’re willing to retrofit with new storage batteries, you’re eligible for the 30% tax credit. When you lease or enter purchase agreements with solar companies, you’re not eligible for the renewable energy tax credits. You must fully own the solar panel system. Moreover, batteries must be 100% charged by the solar system to qualify for tax credits.
Eligibility for 30% ITC on Solar Installations
The conditions required for residential and commercial solar users to get tax credits are as follows:
- You must be the owner of your solar panel unit battery storage systems. Leased systems are not eligible.
- Owners of your home or commercial premise (renters are not eligible)
- The system installed before 31 December 2019 (documents should show commencement in construction or 5 or more percent of the total costs spent in construction before the start of 2020)
- Federal tax liability should be sufficient to qualify you for the ITC 30% tax credit.
Calculating Solar Tax Credit
How do you calculate the amount of credit you’ll receive based on your tax payments? Take for instance a resident who pays $13,000 in federal taxes who happen to installs a $42,000 worth solar system before 31 December 2019. A 30% tax credit on $42,000 sums to $13,000 meaning that they will not pay any taxes in 2019 as the tax credit would cater for the taxes. If instead, he pays $5000 in taxes then, the remaining $8,000 will be rolled over to the next year.
Eligibility for Refund
If you don’t owe any federal taxes, where will your $13,000 go? Tax credits are not tax rebates, and therefore you’ll get no refund. But you can use the amount to cater for taxes you incur within five years of your solar installation.
If using an accountant to file your taxes, make sure to let your accountant know that you are implementing solar energy on your property.
If filing your own taxes:
Check if you are eligible for ITC by making sure you are the proprietor and your federal tax liability are in order.
Complete IRS Form 5965 to validate your qualification for renewable energy credits. Add your renewable energy credit information to your 1040 form that you normal file.
Make 2019 the Year You Go Solar
The time to act is now as the 30% credit is only applicable to installations that take place in 2019. Anything beyond that attracts lower solar tax credits and nothing by 2022. Don’t wait for an extension because it may never come. Get maximum tax credits, go greener and free yourself from escalating electricity bills by installing a solar system before the end of the year.
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NOTE: Infinity Solar, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.