With environmental concerns and energy costs both on the rise, renewable energy solutions are growing more and more attractive to home and business owners every year. In an effort to assist in this move to more sustainable practices, the federal government established a solar tax credit to help defray the costs of the project.
Some of the expenses you are allowed to claim as part of the cost of the project include:
- Solar equipment (solar panels, inverters, mounting hardware)
- Consulting and installation fees
- Shipping costs
- Balance of System costs (such as wiring, nuts, bolts, etc.)
- Tool and equipment purchase or rental
- Permitting service costs and fees
- Battery systems, when paired with solar
What Is the Federal Solar Tax Credit?
Put simply, as a reward for investing in solar energy, you can claim credit for the following year’s federal tax return. For systems placed in service in 2020, you can claim 26% of the total cost of the project. This means that if, for example, you spent $10,000 on your new system, your taxes for the following year would be reduced by $2,600. These tax credits are a one-to-one reduction of your income tax: a one-dollar credit means one less dollar you owe on your taxes.
Deadlines to Receive Solar Tax Credit
After a series of extensions of the Energy Policy Act of 2005, Congress passed a spending bill in late 2015 that makes these credits available in some form through 2021 (and beyond – see updates below).
The pre-extension deadlines are as follows:
- From 2016 to 2019, residential and commercial owners could seek a tax credit of 30% of the cost of the system
- In 2020, residential and commercial owners can deduct 26% of the cost of the system
- In 2021, residential and commercial owners can expect a 22% deduction off their solar installation
- From 2022 on, residential solar owners will no longer be able to claim federal credit, but commercial properties will be able to deduct 10% of their solar costs
Note: the following deadlines have been updated since this blog was first published. Thanks to new legislation, your deadline to receive solar tax credit may be extended (see below).
The 2020 ITC Extension
In 2020, Congress extended the 26% deduction for another 2 years, which is expected to increase solar energy by 20 gigawatts over the next 4 years and inject an extra $22 billion into the economy. The 2020 ITC Extension will also provide much-needed stability during the COVID-19 crisis and its aftermath.
The credit stepdown system (see above) will remain in place but be extended by 2 years.
Differences for Residential & Commercial Properties
For the most part, the tax credits available to residential and commercial property owners are very similar. The phase-out is largely the same for both, until 2022 (now 2024) when residential solar customers will no longer be able to claim tax credits and commercial customers will be down to 10%. Probably the most significant difference is the Safe Harbor clause present in the Business Energy Investment Tax Credit, or ITC, which allows businesses who pay for at least 5% of the total contract price to claim the full tax credit benefit, of the year they paid the 5%, for up to 48 months later. Work on the project must have started in that year and there must be "continuous effort to advance towards completion of the energy property”. This leaves some area for interpretation as the permitting process can take time as well as procurement of materials.
Whether you are looking into solar energy for your home or your commercial property, the time to act is now! Call Alternative Energy Southeast, Inc. today at (770) 691-0966to find out if you could qualify for tax credits on your new solar energy system.