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How Does The Federal Solar Tax Credit Work?

Solar for Homeowners | 3 min read

One of the great benefits of a solar energy investment is the tax benefits. Solar system owners will not only eliminate their electric bill, but they also can recapture 26% of the system cost through the Federal Solar Tax Credit.

The tax credit will have a substantial impact on the payback of your system. However, it won’t be around forever. Make sure you’re prepared to get the most out of your investment by checking out this guide on how the credit works and when it will expire.

 

What Is The Federal Solar Tax Credit?

The Solar Investment Tax Credit (ITC), also referred to as the Federal Solar Tax Credit, gives solar system owners the ability to deduct 26% of the system cost from owed taxes.

In years past, the tax credit allowed you to recoup 30% of installation costs. However, in 2020 this credit began to step down. 2020 is the only year solar owners can save 26% on their system. In 2021, it steps down to 22%. In 2022 it steps down for the final time, and will remain permanently as a 10% discount for businesses only. 2021 will be the last year for homeowners to claim any tax credit.

Federal Solar Tax Credit_Step Down

If you're not quite ready to go solar and would like to think about it, that time could end up costing you. Although going from 26% to 22% may not seem like a big drop, it’s still considerable savings you will miss out on.

Here’s the impact the decrease will have on your savings (this chart represents average costs. Check out this blog for more on the cost of installing solar.):

  System Cost 26% 22% 10%
Residential $20,000 $5,200

$4,400
(-$1,600)
$0
(-$6,000)
Commercial $100,000 $26,000

$22,000
(-$8,000)
$10,000
(-$20,000)

That’s $1,600 that could be reinvested into your home or $8,000 that could go towards purchasing another piece of equipment for your business.

How Does The Federal Solar Tax Credit Work?

First, there are two requirements that need to be met to claim the tax credit:

  1. You must have tax liability. The credit cannot be used if you don’t pay taxes.
  2. The credit is only available for solar system owners. It’s not available for people who lease solar systems. In a lease scenario, the tax credit would go to the lessor (the system owner).

Here’s how it works: If you buy a solar system for $100,000 you would receive a tax credit of $26,000. It is important to understand that this is a federal tax credit that will offset taxes you owe; it’s not a grant that will pay out $26,000.  

In the example above, you could reduce your 2020 taxes by $26,000. If you can’t use the full $26,000 in 2020 (maybe you only owe $18,000 in taxes), you could use the remaining $8,000 to recoup future taxes. However, if you have enough tax liability, the law does require the credit to be used in full the year your system is installed. The $26,000 balance can’t be spread out in increments over several years.

The law does differ on how any remaining money can be used for a homeowner versus a business.

Businesses and farms can use that $8,000 to recoup taxes paid during the prior year and then carry forward any remaining balance for up to 20 years until its fully used.

Federal Solar Tax Credit Commercial Step Down Chart

Homeowners can use the remaining $8,000 from the example above over the next five tax years until the full amount is used up.

Federal Solar Tax Credit Residential Step Down

There is no cap to the amount of your tax credit. You will receive the full 26% credit regardless of your system’s cost.

Additional Tax Benefits for Businesses and Farms

For businesses, the tax benefits extend beyond the 26% Federal Tax Credit. In the recent Tax Cut and Jobs Act, the law changed to allow 100% bonus depreciation for commercial solar systems. This allows the entire cost basis of a solar system to be depreciated in the year it was placed into service.

For example, if you invest $92,000 in a solar system, your business could receive $48,000 or more of that investment back in year one, depending on your tax bracket. Other equipment investments in this same scenario would cost you $192,000 to match the tax benefits that come with a solar investment. That means you will spend nearly 110% more on most comparable equipment investments in order to receive the same tax benefits.  

Don't Miss Out On These Great Benefits

Are you ready to save on your taxes and reduce your energy costs? We’re here to help! Contact us to request your free quote. Don’t miss out on receiving the full 26% tax credit.

You can also download our ebook that answers the most common questions people ask when investing in solar.

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Originally published December 7, 2016, updated January 1, 2020.

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