For most homeowners, the biggest motivators for buying into home solar power are the rising energy rates being charged by PG&E, SMUD, and other utilities. This goes double for anyone being transitioned to time-of-use rates. On average, our customers see energy bills drop by at least 75% after installing a solar power system.
But, there are other financial incentives for going solar. One of the best of those incentives currently being offered is the ITC, or Investment Tax Credit. (Please note that we are not tax experts. Please consult with your tax preparer when claiming the solar ITC).
What is the Investment Tax Credit?
The Investment Tax Credit—often referred to as the Solar Investment Tax Credit—is offered by the federal government to people who purchase solar power systems for their homes or businesses. It’s designed to cut the up-front cost of investing in solar by giving you a partial refund on your solar power system.
It’s important to note that this is not a deduction. Deductions simply reduce the amount of taxable income you have, while tax credits directly reduce the amount of money you owe to the government.
To help show the difference, imagine that you make $60,000 in taxable income this year, and owe $3,000 in taxes. A tax deduction of $3,000 would reduce your taxable income to $57,000, meaning that the taxes you owed on it would be reduced slightly, maybe by a couple hundred dollars.
On the other hand, a tax credit of $3,000 would be subtracted from the $3,000 tax bill, reducing it to $0. That’s a big difference
What costs relating to installing a solar power system does the solar tax credit cover?
The solar ITC is calculated as a percentage of the cost of a solar power system, solar hot water heaters, and wind turbines. But it covers much more than just the hardware. Other related costs which are incorporated include:
- Home batteries and other energy storage systems (even if installed after your solar power system)
- Labor costs for the preparation, assembly, and installation of the system
- Permitting fees, inspection costs, and development fees
- Wiring, inverters, and mounting equipment
- Sales taxes on all eligible expenses
In addition, even some or all of the cost of installing a new roof can fall under the umbrella of the solar tax credit, particularly if your existing roof makes it difficult to install a solar power system. The IRS’s instructions for homeowners applying for the solar credit states, “No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed.”
However, if you’re planning on incorporating the cost of a new roof into your solar tax credit, the roof replacement and solar power installation should occur within a short time frame. The IRS may raise an eyebrow if you make a claim for a new roof, and then wait a couple years to install solar power. It’s also wise to only claim a percentage of the cost of a new roof based on the amount of roof space your solar power system occupies. If your solar power system covers a third of your roof, then you should probably only claim one-third the cost of your roof replacement.
You can also claim some or all of the tax credit for installing a solar power system on vacation and rental homes you live in at least part of the time.
Many people also fail to realize that the legal language of the tax credit is fairly flexible. Solar-improved homes eligible for the tax credit are defined as any home, “where you lived… and can include a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards.”
What you need to be careful about is that the credit cannot be claimed for rental properties and other properties which you don’t live in. But if you install a solar power system on a rental or vacation property that you live in for part of the year, you can claim a percentage of the credit. For instance, if you were eligible for a $5,000 credit for a home you live in 25% of the year, you could claim $1,250 of the credit.
How much is the solar tax credit worth, and is it going to change?
This is the tricky part. The value of the ITC depends not only on the cost of your solar power system but also when you have the system installed and activated. Systems “placed in service” by December 31, 2019 can be credited for 30% of the total cost of installation, after deducting any utility or state rebates. (Note: you do not need to deduct any California or local tax credits—only rebates which reduce the amount you pay upfront for the system.)
But this 30% rate isn’t set in stone. Beginning January 1, 2020, the value of the credit will begin to decrease. The percentage of total costs for which the credit can be claimed is scheduled to decline and phase out as follows:
- 30% for solar power systems placed in service by December 31, 2019
- 26% for systems placed in service between January 1 and December 31, 2020
- 22% for systems placed in service between January 1 and December 31, 2021
- No credit for systems placed in service on or after January 1, 2022
The relatively modest reductions in 2020 and 2021 have led some homeowners to think, “Well, I don’t know if I’m quite ready to go solar, but waiting a little bit isn’t a big deal. 26% versus 30% isn’t a big deal.” But even if the total cost of your solar power system and installation is $25,000, a 4% difference comes out to leaving $1,000 on the table. And that loss will come out to much more if you’re planning on installing a larger system (especially one sized to charge an electric vehicle) or are going to replace your roof.
If you decide to wait until 2021 and your total claimable solar power installation costs comes out to $40,000, you’ll have cost yourself $3,200. And while solar power systems are getting cheaper over time, prices aren’t going down that quickly. You won’t save enough in 2021 to make up for the lost tax credit, and you certainly won’t recoup the costly energy bills you paid in the meantime.
If you plan to go solar while the tax credit is still available, you’ll maximize your savings by acting as soon as possible. This is especially the case because any tax credit can be rolled over into future years. If you qualify for a $9,000 tax credit, but you only owe $3,000 in taxes this year, you can roll the unused $6,000 forward into the next tax year, and into subsequent years if the credit is still active. However, if you buy a solar power system in 2021, you can’t roll any unused credit into 2022, as the credit will be discontinued then. You must exhaust your tax credit by the end of the 2021 tax year, or you’ll lose any remainder.
How do you qualify for and claim the tax credit?
If it’s late in the year when you’re reading this and time is of the essence, you should know that the IRS is a little vague as to what stage of installation establishes the date of ITC eligibility. It’s generally understood that it applies to the date on which the system is approved to operate, though some tax professionals advise playing it safe and using the date your utility connects the system to the local grid. (Note: If you lease your solar power system, the owner of the system will receive the ITC, not you.)
You can claim the credit if you buy a new home with a solar power system installed. In this case, the date you qualify for the credit is the date on which you move into the home. However, you must be the home’s original owner, or be the first user of the system.
How you claim the credit depends upon how you do your taxes:
- By hand: Fill out and attach IRS Form 5695
- Using software: Most popular tax software suites include the option to apply for the solar ITC.
- With a tax accountant or processor: Inform the tax professional handling your taxes that you have had a solar power system installed.
Disclaimer: Regardless of how you handle your taxes, we strongly advise referring to a tax professional. While we are experts at solar power system installation, we are not tax experts. Considering the financial significance of this tax credit, it’s worthwhile to do your due diligence.
If you’re considering purchasing a solar power system for your home, and you would like to learn more about how the solar ITC works, contact Capital City Solar by calling 916-256-2785, or send us a message using our contact form!