Renewable Energy Tax Credit in 2024

Using solar energy offers many advantages such as saving on your electricity bills and reducing your carbon footprints. So it’s not surprising that a growing number of people want to access the free energy the sun provides. Unfortunately, the price of a solar installation remains a major stumbling block.   

If you’re one of those who find the cash outlay for a solar system heavy on the pocket, here’s a bit of good news. You don’t have to shoulder the economic burden of going solar by yourself.   

The solar investment tax credit, which allows you to deduct a specific percentage of the cost of your solar power system from your taxes, is a sweet incentive provided by the federal government for homeowners who intend to put up solar arrays on their property. For an average solar installation, the amount could come close to $9,000 in tax savings. And if you’re lucky enough, your state might even have additional incentives and rebates that will further lessen the upfront cost of your PV system.  

Solar Investment Tax Credit (ITC)

The Federal Solar Tax Credit lets you take off up to 26% of the cost of installing a solar energy system from your federal income tax. It applies to both residential and commercial installations, and there’s no limit to the value of the system you purchased. So whether your photovoltaic (PV) array is worth $15,000 or $30,000, the ITC is available to you.  

However, the ITC is stepping down. Solar systems installed from January 1, 2021, to December 31, 2022, are still eligible for the 26% credit. But when 2023 arrives, the credit will go down to 22%, and, barring an extension from Congress, it goes away entirely for residential solar users in 2024.  

History of Solar ITC

Initially established through the Energy Policy Act of 2005, the solar investment tax credit should have expired in 2007. But due to its enormous popularity and success in stimulating interest and growth in solar energy use, Congress extended the deadline several times. The most recent extension was in December 2020, which allowed the federal solar tax credit to run at 26% for two more years.   

Because of the extension, the solar investment tax credit is still available up to the end of 2023, although at diminishing percentages.  

How does the Solar Investment Tax Credit Work?

With the solar tax credit, you can claim a 26% federal tax credit against your tax liability if you installed a solar energy system on your property. However, to be eligible for the tax credit, you must own the solar panels, meaning you purchased them outright, either through cash or some form of solar financing.   You won’t get the tax credit if you lease the power system or buy electricity using a Power Purchase Agreement (PPA).

Take note that you don’t get a cash rebate with the ITC. Rather, it is a dollar-for-dollar reduction in the income taxes you need to pay the federal government, which will be applied when you pay your taxes for the year following your system’s installation.

Am I Qualified to claim the Solar ITC?

Although owning a solar system can make you eligible to claim the solar investment tax credit, you’ll still need to meet a few criteria to apply for the 26% credit on your federal taxes.  

Residential or Small-Scale Projects

• Your solar system should have been installed and became operational within 2021.  
• The installation is located at your primary or secondary US residential address.   
• You must own the property where the PV system is installed. Renters can’t claim the solar investment tax credit.  
• You should own the solar panels. If you lease the PV system, you cannot avail of the solar tax credit.  
• You must have enough tax liability to meet the 26% solar tax credit.  
• The solar system is new, meaning it’s not being re-used or re-installed.   

Commercial and Utility-Scale Projects

• The solar system should be for the use of a business establishment or entity that pays a federal income tax. Tax-exempt organizations such as charities are not eligible to claim the tax credit.  
• The PV system must be located in the United States or its territories though the tax credit can only be claimed against federal income taxes.  
• The federal solar tax credit only applies to solar installations that use new components and a specified number of second-hand equipment.  
• Solar systems used to generate power for heating swimming pools are not covered by the solar tax credit.  

Included Expenses in the Solar ITC

Residential or Small-Scale Projects

For residential solar systems or those used for small-scale projects, you can claim the solar tax credit against expenses involving the following:  

• The solar panels or solar cells used to power an attic fan (but not the cost of the fan itself)  
• The contractor labor costs involved with: onsite preparation, assembly, and original installation along with associated expenses such as inspection costs, permitting, and developer fees  
• System equipment, including wiring, inverters, and mounting equipment  
• Solar power storage devices paired exclusively with the solar panels associated with the tax credit. This holds even if the storage system was installed at a later date than the solar system. However, the solar power storage device is subject to the installation date criteria.  
• Sales tax on eligible equipment and expenses  

Commercial and Utility-Scale Projects

When it comes to commercial and large scale solar systems, the following expenses qualify for the solar tax credit:  

• The solar panels, along with the inverters, racking, balance-of-system equipment (such as switches, wiring, mounting, and the like), and taxes associated with the sale and use of installation equipment.  
• The installation costs, along with the expenses connected with it  
• Solar power storage devices if the solar system will charge them over 75% of the time  
• Circuit breakers, step-up transformers, and surge arrestors  

Effects of other Incentives on Solar ITC

Residential or Small-Scale Projects

Rebate from Electrical Utilities

Typically, the subsidies your utility gives for installing solar panels are deducted from the cost of your solar system. So if your power utility offers a one-time $1,000 rebate and your solar PV system costs $17,000, you’ll need to deduct $1,000 from the total cost of your solar energy installation.  

Payments for Renewable Energy Certificates

Cash or other incentives given by your utility in exchange for renewable energy certificates are considered taxable income. That means they’ll increase your gross income. However, they won’t reduce the solar tax credit.  

Rebate from State Government

With utility rebates, you’ll need to deduct the rebate amount from the cost of your solar energy system, thus reducing your federal solar tax credit. In contrast, rebates from the state government won’t decrease the federal tax credit you’ll get for putting up solar panels.   

State Tax Credit

State tax credits and federal tax credits associated with a solar PV system don’t affect each other. So even if you receive state tax credits, it won’t reduce your ITC. However, getting a state tax credit for your solar installation will increase your taxable income. Because of the limit imposed on state and local tax deductions, the state tax credit can impact your federal taxable income.  

Commercial and Utility-Scale Projects

Electric Utility and State Government Rebates

Generally, rebates given by utilities or state governments for installing a solar PV system are considered taxable income. Hence, they don’t reduce the tax basis when calculating the solar investment tax credit. However, if a utility gives the rebate for buying or installing any energy conservation measure, including a solar PV system at a residence, the rebate is deducted from the tax basis, thus decreasing the solar tax credit.  

Other Incentives

Other incentives and policies associated with installing solar panels do not curb the tax basis but are considered taxable income.   

They include:

• Earnings from the sale of RECs or other environmental attributes coming from the electricity that a solar PV system produces  
• Income from the state’s performance-based incentive for a solar power system  
• State and local income tax credits  
• Nonprofit grants   
• Local and state property tax exemptions on the solar equipment  
• Loan guarantees  
• Subsidized and tax-exempt energy financing (in 2009 or after)  
• Depreciation deductions  

How do I Claim my Solar Investment Tax Credit?

You can claim the tax credit when you file your annual tax return. Seek professional tax advice to ensure you’re eligible for the tax credit. If you quality you can complete and attach IRS Form 5695 to your federal tax return (Form 1040 or Form 1040NR).

FAQs

Solar ITC, Avail It While You Still Can!

Solar prices keep dropping. It has plunged by an eye-popping 70% since 2010, and experts foresee further reductions in costs. So why not hold off a few months, even a couple of years more, before installing solar panels? Who knows, the price might dip some more, right? 

Wait no longer would be the wiser choice. The best time to go solar is now while the solar ITC is around to give you a hand with the cost of installing a PV system. Sure, the price of solar panels and other equipment might go down further, but will it be enough to offset the tax credits you will otherwise get if you move forward now?  Add to that the amount you will save on your electricity bills if you go solar sooner than later.

The window of opportunity is closing fast. If you want to benefit from the ITC, the time to act is now.  

Updated on 02-02-23