Solar investment tax credit, also referred to as the federal solar tax credit, is an incentive offered by the government to allow residential and commercial properties to deduct 30 percent of the cost of installing a solar energy system from their federal taxes. According to Section 25D of the federal tax credit, residential investment tax credit enables a homeowner to apply the credit to their personal income taxes. The credit is used when a homeowner buys solar energy systems outright and installs them in their home. On the other hand, according to section 48 of the credit, a business that develops, installs, or finances a solar project claims the tax credit.
How do you qualify for the solar investment tax credit?
Anyone qualifies for the solar investment tax credit as long as they own their solar energy system. As mentioned above, homeowners qualify for the credit as long as they buy the solar systems and install them while businesses qualify when they develop, install or finance a solar system project. One good thing with the tax credit is that even if you don’t have enough tax liability to claim the whole credit in 1 year, you get to ‘roll over’ the other remaining credits into the coming years provided the tax credit is still in effect.
However, you need to note that if you sign a lease agreement or PPA with your solar installer, you will no longer be the owner of the solar system and therefore you cannot be eligible for the tax credit.
How do you claim your investment tax credit?
The investment tax credit claim is made when one is filing their yearly federal tax return. Inform your accountant or bookkeeper that you have made an investment in solarin the past year so that they can do the necessary filing properly. If you are doing the filing on your own, look up guides on how to do it. The process is quite simple.
The history and future prospects of the solar investment tax credit
Solar investment tax credit was established in the Energy Policy Act of 2005 and had been set to expire by the year 2007. However, the incentive became too popular with many households and businesses because of its success in supporting the United State’s plan towards transitioning into a renewable energy economy. The Congress was forced to extend the expiration date of the incentive severally. Today, the tax credit is available to homeowners up to 2021 through some plan discussed below.
- 2016-2019- The tax credit will stay at 30% of the total cost of the solar systems
- 2020- The rate will be at 26%. New residential and commercial solar owners can get a 26% tax cut on the cost of their systems
- 2021-The rate for the same deductions will go a notch lower to 22%
- 2022 and beyond- Commercial solar energy systems will still be able to deduct a 10% tax credit on the cost of their systems. However, there will be no federal tax credit for residential solar energy systems from year 2022 henceforth, unless reviewed otherwise.
During previous years, the available legislation on the solar investment tax credit did not allow owners of new solar energy systems to claim tax credit unless their system was functional or operational. However, current legislation allows homeowners to claim tax credit as soon as they buy and install their solar systems, provided that the system is operational by the 31st of December 2023.