If you’ve been on the fence about investing in solar panels for your residence or commercial building, we’re here to tell you that now is a truly great time to invest in solar. While that may sound like a sales pitch, it’s the truth. Thanks to something called the Federal Investment Tax Credit (ITC), 2022 is a great year to invest in solar photovoltaic (solar PV) panels for your home. The ITC is one of the most important incentives available for solar PV, and it is currently offered at 26%, but this rate won’t last.
In December 2020, Congress passed an extension of the ITC to extend the 26% tax credit for systems installed in 2020-2022. The system must be placed in service during the tax year and generate electricity for a home in the U.S. Unless Congress renews it, the ITC expires starting in 2024. There is no maximum amount that can be claimed.
Also Known as the Solar Tax Credit
Originally established by the Energy Policy Act of 2005, the ITC was set to expire at the end of 2007. Thanks to the popularity of the ITC, Congress extended its expiration date multiple times, most recently in December 2020, as we noted above. Also known as the federal solar tax credit, the ITC allows both residential and commercial property owners to deduct 26% of the cost of installing a solar PV system from their federal taxes.
The following is a list of what the ITC covers:
- Solar panel costs
- Labor costs for installation (including permitting fees, inspection costs, and developer fees)
- Additional solar equipment (such as wiring and mounting hardware)
- Home batteries charged by your solar equipment
- Sales tax on eligible expenses
Something worth noting is that if you’re eligible for the ITC but end up not owing taxes for this calendar year, the IRS will not refund you a check for claiming the credit. However, the ITC can be carried back one year and forward 20 years, according to Section 48 of the Internal Revenue Code. That means that even if you didn’t have a tax liability this year, you could either apply the credit toward last year’s tax liability or use the credit anytime you have a liability over the next 20 years.
How Does the Federal Solar Tax Credit Work
Since the ITC was enacted in 2005, the U.S. solar industry has grown by more than 10,000%! Want to know if you are eligible for this tax credit? Here’s a list of the criteria for residential property owners:
- Solar PV system installed between January 1, 2006, and December 31, 2023
- The solar PV system is located at your primary or secondary residence in the U.S.
- You own the solar PV system (either purchased with cash or financing). The solar system cannot be leased or in an arrangement to purchase electricity generated by a system you don’t own).
- The solar PV system is new or being used for the first time (as in the “original installation” of the solar equipment).
Here’s a list of the criteria for commercial property owners:
- The solar PV system must be used by a business that’s subject to U.S. federal income taxes (i.e., it can’t be used by a tax-exempt entity such as a charity)
- The commercial property must be located in the U.S. or U.S. territories
- The solar PV system must be new
- The solar PV system is not used to generate energy to heat a swimming pool
For residential property owners, here’s a list of qualified homes:
- Mobile home
- Cooperative apartment
- Manufactured homes that conform to Federal Manufactured Home Construction and Safety Standards
And finally, here’s a list of the qualified energy-saving equipment:
- Solar-powered units that generate electricity or heat water
- Geothermal heat pumps
- Small wind turbines
- Fuel cell property (limit $500 for each ½ kW of capacity)
- Solar-electric collecting roofs and roof products
- Solar power storage equipment
- Some installation and labor costs
How to Claim Your Federal Solar Tax Credit
To claim your Federal Solar Tax Credit, you will need to file IRS Form 5695 as part of your tax return. Calculate the credit on Part I of the form, then enter your result on your 1040.
If you own a rental property and are considering installing a solar PV system, you can’t currently claim the residential ITC for installing solar power at rental properties you own. But you can claim the ITC if you also live in that house for part of the year and use it as a rental when you’re away. However, your credit will be reduced to reflect the time you’re not there. For example, if you claim you live in the home for 25% of the year, you will be able to claim 25% of the credit.
Solar ITC Phase-Out
As we’ve mentioned, now really is the best time to install a solar PV system due to the 26% federal solar tax credit. However, if you decide to wait to install your solar system, you’ll notice that your ITC benefits will begin to decrease. Here’s a snapshot of how the federal solar tax credit will phase out over the next few years:
- 30% credit for solar PV system placed in service between 2016 and 2019
- 26% credit for solar PV system placed in service between 2020 and 2022
- 22% credit for solar PV system placed in service in 2023 (this is the final year for federal credits for residential solar energy systems)
- 10% credit for solar PV systems placed in service on a commercial building in 2024
Ready to Earn Your ITC?
We’re excited to help you start your solar PV journey, and to help you take advantage of the federal solar tax credit, aka ITC. If you have any questions about the current federal investment tax credit, we’ll also be happy to answer them!