This guide is provided to cover the current federal solar tax incentives available for solar panel equipment and to give you up-to-date information on the requirements to qualify for them. This will allow you to personally assess the incentives you may qualify for by purchasing or leasing a solar panel system. If you do not currently have a tax preparer, it will always be our recommendation to work with a specialist who can help you determine the correct and proper way to file for your personal situation and ensure you are both maximizing the benefits available to you and filing per the current solar tax treatment for solar panel equipment.
Below is a detailed example of the solar tax incentives available for solar panel equipment. The example uses a purchase price of $35,000 for easy figures. The percentages don’t change, so you can adjust the purchase amount up or down to suit your needs.
The Federal Solar Investment Tax Credit.
(This solar tax incentive applies only to purchased solar panel equipment.)
The first available incentive is the Federal Solar ITC, which is a 30% credit on the full purchase price of your system. Based on a purchase price of $35,000, this would be a $10,500 credit. This is a federal solar tax credit and as a tax credit, it is a dollar-for-dollar exchange against your tax liability. It is not a rebate. If you have no federal tax liability, this credit will not benefit you. If you have federal tax withheld or paid throughout the year, then you may receive a refund from the IRS for the amount that you have paid. If you were to owe the IRS, the credit would go against what you owe.
If you are not able to use the full amount of the credit in a single year, the remainder carries forward to the next year. There is no expiration, and it can be carried forward as many years as necessary until it’s used in full. The date of eligibility to claim this credit is based on when the panel’s completed installation. Meaning if your panels are installed by 12/31/2023, then you are eligible to take the credit for the 2023 tax year. If your panels are installed by 12/31/2024, then you are eligible to take the credit for the 2024 tax year.
Fortunately, qualifying for the Solar ITC is fairly straightforward in that essentially anyone who purchases solar panels qualifies to claim the credit. For more detailed information, please review the Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics linked here: Homeowner’s Solar Credit Guide.
The below incentives will have further requirements in order to qualify. The main requirements to claim the below incentives are the following:
- You must own the property where the panels are located.
- You must own or be leasing the solar panel equipment. You may not be on a PPA (Power Purchase Agreement) or any other arrangement.
- The solar panel equipment is being used in an income-producing activity.
The requirement of the equipment being used in an income-producing activity is often met by entering into a Net Metering Agreement with your local utility company or by the sale of SRECs generated by the solar panel equipment. The Department of Energy updated their Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics to say that the compensation received for distributing energy into the grid is considered taxable income. The most applicable part of the information from the www.energy.gov guide is quoted here:
“When your utility, or other buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental attributes of the electricity generated (either upfront or over time), the payment likely will be considered taxable income. If that is the case, the payment will increase your gross income, but it will not reduce the federal solar tax credit.” (The highlighted portion in the above quote links directly to an issued IRS Private Letter Ruling.) You can review the full guide here: Homeowner’s Solar Credit Guide.
Net Metering/MACRS Solar Tax Incentive
The second available incentive is the Modified Accelerated Cost Recovery System (MACRS). This is the largest available incentive besides the original Federal Solar ITC. The MACRS incentive will allow you to deduct 85% of the full purchase price of the system. Based on a $35,000 purchase price, this would take an additional $29,750 and claim it as a 100% deductible. Being a deduction, the amount this benefits you will depend upon your personal tax bracket.
The federal tax brackets range from approximately 12-37%. State tax brackets range from approximately 0-14%. The deduction goes against both. Using an example of a 32% tax bracket, that would result in a total benefit of $9,520 on top of the 30% Federal Solar ITC. This incentive is typically claimed over a 5-year schedule, where you claim 10% of the deduction in year 1, 20% of the deduction in years 2-5, and the final 10% on your 6th filing. However, it can be claimed over shorter periods in certain cases.
You must be Net Metered or selling SCRECs to qualify for this incentive. The date of eligibility to claim this incentive is based on when your system went live and started to generate power. This is often referred to as your Net Meter or PTO date. Meaning if your net meter date is listed as 12/31/2023 or earlier then you are eligible to claim the deduction for the 2023 tax year. If your net meter date is listed as 12/31/2024 or earlier then you are eligible to claim the deduction for the 2024 tax year.
Straddle Effect
Do be aware that it is common for a solar panel system to be installed in one year and not be turned on until the following year. You don’t lose any incentives due to this; it simply means you will break the incentives up over the two tax years. In the event of that situation, we provide the paperwork for both years. Depending on your personal tax situation, this can end up being advantageous as many people have little to no tax liability left over after claiming the large Federal Solar ITC for the first year anyway.
Interest and Finance Fees for Solar Taxes
The third available incentive is the ability to deduct expenses such as the interest or finance fees paid if you have a loan for the solar panels. You will charge any revenue that you may have received from the utility company in the form of cash or credit for excess energy production against these expenses. As an example, $35,000 financed at 3.99% is going to be nearly $1,400 a year that you are paying in interest which can be made up to 100% tax deductible.
State Solar Tax Benefit
As a side effect of claiming the above Federal Incentives, you will be lowering your Adjusted Gross Income (AGI). This will automatically lower the AGI for your State Tax filing and depending on your state tax bracket can result in hundreds or even thousands of dollars in additional savings.
Conclusion:
Using the above example, you would qualify for the following:
Credits:
- Federal $10,500. If you are not receiving this amount back in full the first year, it is either because you did not pay enough in taxes throughout the year, or you owed the IRS and it was charged against that. Any remainder you don’t claim this year will carry forward.
Deductions:
- MACRS Deduction for $29,750 and Interest over 10 years at $14,000 totaling $43,750. The amount this benefits you will be based on your tax bracket, but just like the credits any amount you don’t use will carry forward to the next taxable year. Using a 32% tax bracket as an example, this would mean $14,000 in savings.
Following this example, using a 32% tax bracket on a $35,000 purchase price, you would be looking at a net of roughly $24,000 in incentives owed to you. This would represent nearly 70% of the full purchase price being saved. Your final amounts may be higher or lower, depending on your personal solar tax situation. On top of the amounts listed above, assuming you are in a state with income tax, you will have the additional benefit of savings on state taxes from a lowered AGI.
You can see now how over time there can be clients writing off a significant portion of the purchase price of their system through these available solar tax incentives. While you will report the income from the solar equipment for the life of the system, you can continue to deduct related expenses such as net metering fees, cleaning and maintenance, interest, and finance fees for as long as you are paying them. With knowledge of your tax bracket and working with a personal tax advisor, this breakdown should give you a fair estimate of what to expect for yourself moving forward.
Want more insight into getting the most out of your solar system? Check out our other blog posts!
