Taxes: Solar Power And The Federal Tax Credit
Daily headlines remind us of how unreliable and vulnerable our traditional power grids are, which is why more and more accountants are exploring the possible taxpayer savings of solar power for their clients. When the suns rays beat down on solar panels, they produce electricity that can be used and stored. With solar panels people can actually own their energy, bringing them potential savings on monthly electric bills, while having access to power during outages.
Furthermore, clients will benefit more when solar power is installed with a battery backup system to prevent monetary losses due to spoiled food, medication, or the inability to work from home. Thats because stored solar energy can keep the lights on and coolers running.
Unfortunately, solar power tax benefits are too often only communicated in the bigger conversation of eco-friendly green initiatives, so not enough accountants are aware of the details. Below are 4 things you need to know when advising your clients:
When it started and what it means now.
How the tax credit rollover factor works.
State & local tax credits.
Depending on the state in which your clients reside, this could be a very significant tax savings. For example, South Carolina presently offers a 25% state tax credit on solar installations. This means that Palmetto State homeowners could potentially benefit from an up to 51% credit on the net cost of their solar system between the combined state and federal incentives.
Is The Federal Tax Credit For Solar Panels Going Away In 2020
More than 2 million homeowners nation-wide have made the switch for their home to clean solar power. Over 140,000 of those homeowners are right here in our home state of Arizona! Arizona currently ranks 3rd in the whole country for solar installed according to the Solar Energy Industries Association.
Its no wonder why Arizonans like solar power, we have over 350 days of sunshine a year and generous programs from the electric utilities and our state government to help offset the cost of going solar.
The main incentive the state of Arizona offers to homeowners going solar is a $1000 tax credit on your state taxes. This tax credit is good through the end of 2020.
Another factor that many Arizona homeowners take into account when making the decision to go solar is the tax credit the federal government gives for homeowners installing solar panels. This is referred to as the Federal Investment Tax Credit. Since 2006, it has provided a 30% tax credit on the total cost of purchasing a solar panel system.
For 2020, this number will be stepped down to 26%, and it will be brought down further to 22% for 2021. After 2021, the tax credit will be eliminated unless it is extended by new legislation.
Our solar purchase program for 2020 are saving customers on average 20% the very first month after installation and over $50,000 of savings over the life of the solar panel system!
What Expenses Are Included
The following expenses are included:
- Solar PV panels or PV cells used to power an attic fan
- Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees
- Balance-of-system equipment, including wiring, inverters, and mounting equipment
- Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed
- Sales taxes on eligible expenses
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What Is The Solar Tax Credit
The Solar ITC is a 26% tax incentive on your gross solar system cost.
The only requirements are that you:
Note, if your 26% tax credit is $6,000 total, and you only have $5,000 in personal income taxes one year, you can roll over the remaining $1,000 to next years income taxes.
This incentive has been huge for home and business owners since 2005 as part of the Energy Policy Act. The federal government has already extended the incentive expiration date twice before. The most recent extension in 2020 added a 26% extension until 2022 and step down schedule that gradually phases out the credit over a few years.
How To Qualify For The Solar Tax Credit
In order to qualify for the solar panel tax credit, you must own your home and you must pay enough taxes to the federal government that the ITC can offset your tax payment.
For example, if you paid $10,000 to install solar on your home in 2021, then the 26% ITC would mean you are eligible for a tax credit of $2,600. In order to claim that credit, you need to have owed at least $2,600 in federal taxes before the solar tax credit. If you owed more than $2,600 then the ITC would reduce the total amount that you owe. If you owed less than $2,600 then the ITC would eliminate your tax liability for that year.
In addition, if you do owe less than your total ITC savings for the year that you install your solar power system, you can actually roll over any remaining credits to the following year, so that you dont lose the value of those credits. For example, if you were eligible for $6,500 in tax credit, but only owed $4,000 that year, then you would completely eliminate your tax payment for that year, and the next year you would be able to deduct an additional $2,500 from that years tax payment as well.
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Claiming The Solar Credit For Rental Property You Own
You can’t claim the residential solar credit for installing solar power at rental properties you own. But you can claim it if you also live in the house for part of the year and use it as a rental when you’re away.
- You’ll have to reduce the credit for a vacation home, rental or otherwise, to reflect the time you’re not there.
- If you live there for three months a year, for instance, you can only claim 25% of the credit. If the system cost $10,000, the 26% credit would be $2,600, and you could claim 25% of that, or $650.
- $10,000 system cost x 0.26 = $2,600 credit amount
- $2,600 credit amount x 0.25 = $650 credit amount
Federal Tax Credit For Residential Solar Energy
The federal solar tax credit for solar energy upgrades to your home may not be around for much longer. Here’s how to claim this credit.
In an effort to encourage Americans to use solar power, the U.S. government offers tax credits for solar-powered systems. Let’s take a closer look at some of the benefits of the solar tax credit and how you can claim it.
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Are You Eligible To Claim The Federal Solar Tax Credit
In order to claim the federal solar tax credit and get money back on your solar investment, you have to meet the following criteria when filing your 2021 taxes:
- Your solar PV system must have been installed and began operating at some point between January 1, 2006, and December 31 of this year.
- Your system must be installed at either your primary or secondary residence.
- You must own the solar PV system, whether you paid upfront or are financing the cost.
- The solar system must either be brand new or have been used for the first time. You only get to claim this credit once, for the “original installation” of your solar PV equipment.
California Solar Tax Credits
California was one of the first and most aggressive adopters of solar. Several years ago, when solar was much more expensive the State of California offered some impressive state tax credits. Over the years, the price of solar has dropped dramatically. Meanwhile California faded out the state tax credit. While the Federal Solar Tax Credit is still strong, there is no longer a California solar tax credit available. However, California still has some of the most expensive electric bills in the country. So while there is no state tax credit, homeowners in California still have the best ROI in the country because the utility companies pay more for solar energy than other states.
What Does The Itc Step Down Mean For Homeowners
Homeowners that are considering installing rooftop solar panels on their home will see little tax benefit to do so, especially after the ITC steps down again in 2021 to an even lower 22% credit. By 2022, the Federal Solar Tax Credit will only be available for commercial installations at a rate of 10%. That means that homeowners will not see a tax benefit for rooftop installation at all by 2022.
The credit is only for the tax year that the system was installed. Each time the credit steps down, homeowners receive less of a credit on their tax refund. While a 4% decrease this year may not seem like much, that 4% adds up quickly when you consider the cost of purchasing a rooftop solar system for your home. Lets say the system that you decide to install this year costs $25,000. The credit for 2020 will be $6,500 vs. $7,500 that it would have been just last year in 2019. By 2021, you would only receive a $5,500 credit. Because you can also claim any additional work required to install the system, as well as the batteries required to run it, you also lose 4% on those cost savings too.
When Does The Solar Tax Credit Expire
Technically, the solar tax credit does not expire for businesses under the current law. It only expires for residential taxpayers in 2022. However, this does not mean youll want to wait to install solar power for your business. Youll only be able to take advantage of the full 30% tax credit in 2019.
Beginning in 2020, the credit will begin to decline over time. In 2020, owners of new commercial systems can only deduct 26% of the cost. The credit drops to 22% in 2021. While the residential tax credit goes away entirely in 2022, the commercial solar tax credit drops to only 10% of the cost of a new system. The commercial tax credit will remain at 10% indefinitely unless Congress passes additional legislation.
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Taking Advantage Of The Extended Solar Tax Credit
The ITC extension is useful for homeowners and businesses who were considering PV systems, but were unable to start before the 26% tax credit ended. For example, a commercial building scheduled for 2022 would have only received a 10% ITC for a solar array. With the two-extension, a project like this can claim the 26% tax credit that is currently available.
The federal tax credit can also help pay for solar installations that are financed with loans. As the legal owner of the solar array, you receive all tax benefits even if the system was purchased with debt. The tax credit can also help cover energy efficiency measures, such as LED lighting or HVAC replacements.
Energy storage systems can also benefit from the extended tax credit – if they get at least 75% of their charge from an onsite renewable energy system, they are eligible. Unlike solar panels, battery systems are an emerging technology that is still expensive. However, the ITC extension gives two additional years for their cost to decrease. If there is a major breakthrough that drops the cost of batteries in the short term, it can be combined with the 26% ITC.
Why 2022 Is The Year To Go Solar If You Can
Nothing lasts forever, and the federal solar tax credit is no exception. If you want to invest in solar energy for your home, 2022 is the last year to enjoy maximum benefits under the ITC.
Starting in 2023, the federal tax credit will drop to 22%. After that, unless Congress extends it again, there will be no residential tax credit on solar panels.
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Many Solar Supporters Say The Loss Or Reduction Of The Credit Will Be A Cliff For The Industry But Others Say The Credits Impact Is Overstated And Solar Will Continue To Grow
The tax credit has offered a 30% break for investing in solar systems.
Whats going to happen when a huge incentive to invest in solar power shrinks or vanishes?
At the end of next year, the 30% investment tax credit for solar and other renewable power is set to expire for residential systems and plunge to 10% for commercial installations. Boosters are calling for Congress to extend the credit in its current form.
The tax-credit crunch is looming at a time when solar is on the rise. Solar installations increased 30% last year, thanks partly to cheaper photovoltaic panels. Solar proponents note that the solar industry employs more than twice as many U.S. workers as coal mining and has added jobs 20 times faster than the rest of the economy.
Many supporters say the abrupt end date of the 30% credit represents a cliff for the industry. Without the current incentive, they argue, installation of solar-power systems will plummet, and thousands of jobs in the industry will be lost as a result.
Others, however, argue that the cliff isnt as steep as it appears, and that solar will continue to grow even without the 30% creditalbeit not as quickly as before.
YES: The Industry Will Need Many Years to Recover
A big drop ahead
Can the solar industry survive without the current credit? Yes, but not as we know it today.
Misreading the situation
NO: Grim Forecasts Overstate the Drop For Several Reasons
New ways to finance
Impact Of The Solar Tax Credit
As the United States races to achieve rigorous clean energy benchmarks, the federal policies and incentives to get us there have heightened. On both a distributed and utility-scale level, solar deployment has grown quickly across the country. The federal tax credit has given businesses, homeowners, and tax payers the opportunity to drive down solar costs while increasing long-term energy stability. The ITC has been a driver of huge success, giving us a stronger and cleaner future: in fact, according to the Solar Energy Industries Association , it has helped the U.S. solar industry expand by over 10,000 percent! Learn more about how solar panel costs and efficiency have changed over time.
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What Does The Trec Program Mean For The Solar Industry
The idea of losing one of the most significant incentive programs available in the state shook up the solar industry in New Jersey in a big way.
To top it off, the October proposal introduced the idea of extremely low incentive prices, especially for residential rooftop solar systems. Some installers feared that the low TREC prices might discourage people from installing solar in NJ.
Luckily, the final framework makes it easier for installers to plan for the future.
The fixed price of TRECs will allow solar installers to accurately figure out the payback period for future solar systems. This will allow installers to adjust their prices so solar remains attractive to new customers, while also keeping their business afloat. If TRECs were market-based, like they had been proposed to be in October, installers wouldnt have been able to prepare for the future nearly as well.
Also, the final Transition Program TRECs have a higher value than the value proposed back in October.
Although the TREC price is still lower than the NJ SREC program price, the final set of rules approved in early December will save customers over $1,000 more than the original proposal would have.
So, solar will be a little more affordable than it previously seemed.
How Do Solar Loans Affect The Solar Tax Credit
There are two types of solar loan in relation to the tax credit. Type 1 has one monthly payment amount. These loans assume that you will submit your tax credit to the lender to buy down your principal and secure that monthly payment. If you do not put your tax credit back into your loan, this will initiate another loan, in the amount of your tax credit, at the same APR.
The second type of solar loan is one in which there is a different payment amount for year one than for the subsequent years. In this type of loan, your payments are based on the entire loan amount. When you receive your federal tax credit, youll have the option to use it to re-amortize your loan to secure lower monthly payments. You can also keep the federal tax credit, and your payments will remain the same. Solar.com can help figure out which solar financing option is best for you.
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What You Need To Claim The Tax Credit
- The receipts from your solar installation
- IRS Form 1040 for 2020
- IRS Form 5695 for 2020
- Instructions for both those forms
- A pencil
- A calculator
Fill out your Form 1040 as you normally would. Stop when you get down to line 20, and move to Schedule 3, which uses your calculations from Form 5695 on line 5.
What Part Of Your Electric Bill Do Solar Panels Eliminate
Your solar panels will reduce or eliminate the electricity delivery part of your bill. Every utility bill will look different, so youâll need to pull up your copy to see how your company itemizes the individual charges.
On my bill, the part of the monthly statement that lists my electricity usage for the month is titled Delivery Services. Your bill may label this a little differently. Some utilities will have separate charges for delivery and generation. If thatâs the case, youâll see sub-charges for each, but also a total charge for your electricity usage.
Whatever the case, your bill should list your total electricity usage in kilowatt-hours . Itâs this part of your monthly bill that your solar panels will apply to.
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