Tax Credits for Solar System Purchase
Solar consumers are eligible for federal tax incentives for the purchase and installation of eligible solar systems, including both solar photovoltaics (PV) and solar hot water (solar thermal) systems, as well as other renewable energy investments.
The following information regarding taxes, tax credits and depreciation is meant to make the reader aware of these benefits, risks and potential expenses, and help avoid claims by aggressive salespeople. It is not tax advice. Please seek professional advice from a qualified tax advisor to check the applicability and eligibility before claiming any tax benefits or exemptions.
Solar tax credits were enacted in 2008 as part of the Emergency Economic Stabilization Act, which included $18 billion in incentives for clean and renewable energy technologies, as well as for energy efficiency improvements. The 2008 legislation extended the solar investment tax credit (ITC) through December 31, 2016 and made other modifications to the tax credits. Legislation in late 2015 renewed these credits for five years with an incremental de-escalation of the credits. The solar ITC offers:
A federal investment tax credit for both residential and commercial consumers is available for both photovoltaics and solar water heating systems..
A consumer must have a federal tax liability to take advantage of the solar investment tax credit.
Prior to 2009, residential solar installations had a per project cap of $2,000 tax credit. With current legislation, the solar ITC for residential system owners is 30% of the total system cost with no upper limit.
The 30% rate is available for systems placed in service through December 31, 2019. The credit drops to 26% through the end of 2020, then 22% through 2021 before dropping to zero by the end of 2021.
The federal tax credit is a one-time credit, but may be carried forward (and possibly back) if not completely useable in the system installation tax year. Rules about carrying forward and backward may vary between residential and commercial tax filers; please consult a tax professional for the current rules.
Eligible projects may take a "grant in lieu of tax credit" under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603). The 1603 grant program is administered by the United States Department of the Treasury (Treasury). By receiving payments for property under section 1603, applicants are electing to forego tax credits with respect to such property for the taxable year in which the payment is made or any subsequent taxable year.
Residential customers in higher income tax brackets see comparatively more value because residential electricity expenses are paid with after-tax dollars—they aren't tax deductible.
The IRS current federal tax form for the Investment Credits is Form 3468 is available at www.irs.gov/formspubs.
Business owned systems may also be eligible for MACRS 5-year Accelerated Depreciation using IRS federal form 4562 available at www.irs.gov/formspubs. For more info on commercial tax benefits please contact your tax preparer or a tax attorney.
Municipal and non-profit entities do not have to worry about these tax issues, as they are generally tax-exempt.
The solar system owner has the ability to take advantage of the solar tax credit. Entities without a federal tax liability sometimes use third-party system owner arrangements to install solar since a third-party can take advantage of the solar investment tax credit, passing along some savings to the solar system host customer.
Bonus Depreciation was expanded to 100% for solar projects placed in service in 2011, and 50% for projects placed in service in 2012. "Bonus Depreciation" means acceleration of the otherwise applicable depreciation (not "more" depreciation, but "sooner" depreciation). 100% Bonus Depreciation means that the whole project's applicable tax depreciation is accelerated to 2011.
Additional Solar Tax Credit Information Resources
Emergency Economic Stabilization Act entire bill, including Division B: Energy Improvement and Extension Act of 2008.
OnGrid Solar, a solar sales software company, has prepared several useful financial resource guides for consumers that are interested in solar financial decisions. See in particular Andy Black of OnGrid Solar's paper on solar payback.
Tax Incentives Assistance Project for more information on solar and energy efficiency tax credits.
The Database of State Incentives for Renewables and Efficiency provides information on all state and federal incentive programs around the country.