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Federal Tax Credit for Solar Owners

Disclaimer: This article provides an overview of the federal investment tax credit for those interested in residential solar photovoltaics, or PV. It does not constitute professional tax advice or other professional financial guidance. And it should not be used as the only source of information when making purchasing decisions, investment decisions, or tax decisions, or when executing other binding agreements.


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What is a tax credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. The federal tax credit is sometimes referred to as an Investment Tax Credit, or ITC, though is different from the ITC offered to businesses that own solar systems.


What is the federal solar tax credit?

The federal residential solar energy credit is a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system. (Other types of renewable energy are also eligible for similar credits but are beyond the scope of this guidance.)


The system must be placed in service during the tax year and generate electricity for a home located in the United States. There is no bright-line test from the IRS on what constitutes “placed in service,” but the IRS has equated it with completed installation.


In December 2020, Congress passed an extension of the ITC, which provides a 26% tax credit for systems installed in 2020-2022, and 22% for systems installed in 2023. (Systems installed before December 31, 2019 were eligible for a 30% tax credit.) The tax credit expires starting in 2024 unless Congress renews it.


There is no maximum amount that can be claimed.


Am I eligible to claim the federal solar tax credit?

You might be eligible for this tax credit if you meet all of the following criteria:

  • Your solar PV system was installed between January 1, 2006, and December 31, 2023.

  • The solar PV system is located at your primary or secondary residence in the United States, or for an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption. The IRS has permitted a taxpayer to claim a section 25D tax credit for purchase of a portion of a community solar project.

  • You own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing nor are in an arrangement to purchase electricity generated by a system you do not own).

  • The solar PV system is new or being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.

What expenses are included?

The following expenses are included:

  • Solar PV panels or PV cells used to power an attic fan (but not the fan itself)

  • 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 (however, the energy storage devices are still subject to the installation date requirements)

  • Sales taxes on eligible expenses

Where can I find more information?


ASK QUESTIONS

Internal Revenue Service (IRS), 1111 Constitution Avenue, N.W., Washington, D.C. 20224, (800)829-1040.


FIND RESOURCES

The federal statute and IRS guidance: 26 USC § 25D at www.gpo.gov and “Q&A on Tax Credits for Sections 25C and 25D” at www.irs.gov.


Updated information on the current status of the ITC: Database of State Incentives for Renewables and Efficiency entry on “Residential Renewable Energy Tax Credit” at www.dsireusa.org.


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