Solar Investment Tax Credit (ITC) - The Truth, the Whole Truth, and Nothing but the Truth.
The Solar Tax Credit, also known as the Solar Investment Tax Credit (ITC), is a staple for solar development nationwide since the Energy Policy Act of 2005. This federal tax credit offers buyers of solar power systems incentives to reduce the amount of taxes you owe or pay the following year after their purchase. It helped homeowners, and commercial businesses, to afford solar technology, especially during the beginning when costs were higher than they are now. This article explains the ITC and why it's crucial to invest before it changes.
As you read below, here are the key takeaways to remember for the Solar Investment Tax Credit:
- Installing a solar energy system through 2022 will give buyers a 26% of project costs tax credit
- The solar tax credit drops to 22% in 2023
- The claim can be used for any costs related to equipment, permitting, and installation.
- Qualifying solar projects can be residential, commercial, industrial, and or utility-scale
- Buying a residential solar system after 2023 will render no tax benefit
How does the Federal Solar Tax Credit work?
Well, first you have to buy a system. That fact is probably apparent, but after that, the math fun begins. You will bring the "receipt" of your solar system purchase to your tax processor the following year. The costs you claim can be all those you incurred in the following areas:
- Solar equipment (including battery storage)
- Freight shipping costs
- Solar consulting fees
- Professional installer fees
- Electrician fees
- Engineer fees
- Tools bought or rented
- Wiring, screws, bolts, nails, etc.
- Equipment purchased or rented (scaffolding or a man-lift, for example)
- Permitting fees
- Permitting service costs
- Contractor Costs (if you hire out instead of installing yourself)
- Roofing Repairs or Replacement
Suppose you install the system yourself, which puts you dealing with the electrical code, approval, and permitting. In that case, you can still claim the equipment purchases and other items on the above list.
Accounting for all your project costs, your tax processor can total those costs and use 26% of the sum to lower your taxes owed. For example, all said and done, you end up paying $21,000 for your solar energy system. If you have a $5,460.00 tax credit, you pay $5,460.00 less federal taxes. You get a 26% credit based on your solar system’s total cost, including the items listed above. You can use this 26% to offset taxes owed, and or if you already paid this amount through your paycheck in tax withholdings, you can get it as a refund.
Homeowners with an average electric consumption will require about 7kw or 7000 watts. Option One Solar customers will pay an average of $21,000.00 for a complete turn-key installed system. The 26% federal tax credit would equal $5,460.00, which can be used to offset taxes owed or can be a refund and used to pay down solar financing costs. Your net cost for solar drops to $15,540.00; this makes the return on investment very good.
We recommend consulting with your tax processor to ensure filing everything correctly. We are not tax professionals, but we provide our customers with the documents and direction they need to get the most out of their solar investment.
Understanding Federal Tax Credits and How they Apply:
To qualify for the 26% Federal Tax Credit:
- Install your system by December 31, 2022.
- You must own your home.
- You must pay or owe federal taxes in order to use the tax credit.
- You must own your solar, and it must be new. Financing is ok.
Tax Credit vs. Tax Credit Refund
It is important to understand, this is a federal tax credit, which means you must pay or owe federal tax. Typically you pay this through your employee contributions if you are a W-2 employee or through quarterly payments if you are self-employed. You can only use this tax credit to offset taxes owed or create a refund of taxes already paid through payroll in the installation year. You can not get money that you did not pay in or owe, meaning you had no tax liability. For example, if you are on permanent disability and it is non-taxed, you have no taxable income, and therefore the tax credit may not apply. But you can go backward and pay off any owed taxes from previous years.
Qualifying for the Solar Tax Credit
Those paid by a W-2 paycheck usually pay taxes through payroll automatically, creating a refund or liability depending on elected withholdings, which are adjustable at any time. You can pay more to the IRS by increasing your withholdings resulting in a larger refund, or you can pay less and withhold the same amount you would get refunded. Instead of paying money to the IRS, divert that money toward the solar system. It’s simple, give it to the IRS or Keep it yourself!
If you are self-employed, you typically pay taxes owed on a quarterly or annual basis. You can use the tax credit to offset taxes you owe, and, instead of paying money to the IRS, you divert that money toward the solar system. It’s simple, give it to the IRS or Keep it yourself!
It’s important to note that the tax credit can carry forward, which means you can use any remainder from this year as a credit towards future years.
Homeowner #1 buys a $30,000 solar system, meaning they are eligible for a $7,800 tax credit (26% of system costs). They owe the government $10,000 in taxes through their employment wages, but the withheld amount was through payroll, so they end up owing nothing when they file because they already paid the liability owed. In this example, when applying the solar tax credit to the $0 balance they owe the government, they receive a tax REFUND of $7,800. They can then take this and apply to their solar loan and pay it down. You are getting to keep $7,800 of your own money.
Homeowner #2 buys a $30,000 solar system, meaning they are eligible for a $7,800 tax credit (26% of system costs). They owe the government $7,800 in taxes through their employment wages, but this customer did not withhold any money from their paychecks and still owes $7,800 when they file. They will apply their $7,800 tax credit and offset the $7,800 of taxes owed, which leaves zero taxes owed. In this example, the money they would have had to pay the taxes offsets due to the tax credit, but now that money is available to buy down the solar loan.
If the tax credit is greater than your overall tax liability (taxes owed), then you can carry this over to further years. You can also use tax credits to pay back taxes owed, meaning you can go backward.
How do I use the tax credit to pay down my Solar loan?
You have a 26% tax credit amount to utilize, and you can wait till you get a refund or accumulate the funds through higher payroll deductions. You can pay your solar loan down anytime within 18 months, and the finance company will lower your balance resulting in a lower payment. If you have enough cash on hand equal to the 26% tax credit and you’re in a position to apply it to the loan upfront, this will give you a smaller loan and payment and interest savings right now. You reimburse yourself when you receive the tax credit from the two options above.
Disclaimer: We understand how the tax credit works, but we are not tax advisors. This information is only for your reference. Everybody has a different financial and tax situation, and the above is intended as an example only. Always talk with your tax advisor.
What is the best option: Cash - Finance - Lease - PPA
There are a few options when you invest in a solar energy system. You can buy outright, finance, or choose a lease or PPA. With buying and financing, you own it, get to claim the ITC federal tax credit, and have the highest return on investment (ROI) over leasing and PPA. If you use cash, you can reimburse yourself with the tax credit. If financing, most customers use the tax credit to pay down the loan. Typically customers choose our 2.99% fixed rates program for 12, 20, or 25 years. However, suppose you lease your solar system. In that case, the leasing company gets to claim the solar tax credit and makes money off you, you never own it, and it's basically like switching to another electric company at a slightly lower cost.
A cash purchase will typically offer the highest return on investment and the shortest payback. Our average customer return on investment is over 16% and less than 5 years payback; we have many customers who see over 20% returns and less than 4-year paybacks. The higher the electric consumption and bill, the higher the return. Under this program, you keep your tax credit.
If you are not in a position to pay cash outright for your system, financing is the best alternative; Option One Solar has over 30 years of experience in financing, we offer zero down, zero out of pocket programs with as low as 2.99% fixed rates for 12, 20 or 25-year terms. Under this program, you keep your tax credit. But the tax credit can include all fees, including finance fees and points. To maximize your total investment, we take the standard 8.99% solar loan rate and buy it down to 2.99%, basically converting long term interest into upfront points and fees that can be included in your tax credit, thus increasing your total credit. This option allows 26% of all costs, fees, points, etc., and maximizes your entire investment and tax incentive.
PPA or Lease (Generally, far less favorable than owning.)
Some homeowners may consider leasing their solar systems or enter into a PPA, power purchase agreement. We would only recommend these two methods as a last resort and only if financing is not an alternative or the best return on investment for your financial plans or needs. On a lease or PPA agreement, the company keeps YOUR tax credit. Under this program, you do not keep your tax credit. In most cases, we can prove that our financing program will have a better return on your investment, even if you can not get the tax credit.
How do I claim the Federal Tax Credit?
To learn how to fill out the applicable IRS forms to claim your Solar Investment Tax Credit, visit our Solar Learning Center Article, Claiming the Solar Investment Tax Credit.
Or, to learn how to fill out the applicable IRS forms to claim your Residential Renewable Energy Tax Credit over two tax cycles, visit our Solar Learning Center article, Claiming the Solar Investment Tax Credit Over Two Tax Cycles.
Why act now?
These deals won't last forever, and expectations are they will go lower and offer fewer benefits. Buying your system after January 1, 2024, means you lose money. Even buying your system after January 1, 2023, loses you money. That would be 4% more money back if you invest now.
Take advantage of this solar tax credit by getting award-winning professional help today!