When home and business owners prepare to go solar, it is important to consider the financial implications. Most solar systems installed in the United States today will pay for themselves in savings within five to ten years. The payback period depends on many factors, including the federal tax credit.
What is a solar tax credit?
Tax credits are a dollar-for-dollar reduction in federal income taxes owed to the government and are therefore more valuable than a tax write-off. To be able to take advantage of the tax credit, the homeowner or business must have an adequate tax burden or appetite. It is essential to speak with a tax specialist to determine eligibility before purchasing the solar system.
The federal government offers a generous tax credit that can significantly decrease the total cost of a solar system. It is called an investment tax credit (ITC) or solar tax credit. A 26 percent tax credit is available in 2020 and this will decrease to 22 percent in 2021. This opportunity is available for residential, commercial, and utility-scale solar systems. Even off-grid solar systems or grid-tied solar systems with battery backup can quality.
What expenses qualify for the solar ITC?
The tax credit is applied to the total cost of the solar system and includes the solar panels, inverter, mounting hardware, other components, permitting costs, and labor. If the cost of the solar system is $15,000, then a 26 percent tax credit equals $3,900 and a 22 percent tax credit equals $3,300.
$15,000 x .26 = $3,900 – in 2020
$15,000 x .22 = $3,300 – in 2021
What properties and installations qualify for a solar tax credit?
Primary residences, new construction projects, vacation homes, and businesses are all eligible for the tax credit. Commercial and utility-scale projects can also qualify for accelerated depreciation or bonus depreciation, further reducing federal taxes.
Solar systems need to be owned by the homeowner or business owner, thus leased installations are not eligible. DIY solar systems can also qualify for the tax credit for the equipment and permitting costs, but not for unpaid labor.
How do I apply for the tax credit?
People typically gain the benefits of the tax credit when filing tax. Thus, solar systems that are installed in 2021 can reduce the 2021 tax liability when filing in 2022. When using a tax preparer, be sure to inform them about installing a solar energy system. To apply for the residential tax credit, use IRS form 5695.
After 2021, the residential solar tax credit is set to end and the commercial tax credit will decrease to 10 percent unless extended. Keep in mind that installing a solar system can easily take several months so it is important to plan accordingly to take advantage of this credit before it expires.