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How Does the Federal Tax Credit Work?

As you most likely know, there is a 30% tax credit available for solar energy systems until the end of 2019. After the 2019, the tax credit will then step down to 26% in 2020, 22% in 2021 and then down to 10% for businesses (residential will drop to 0%) in 2022.

But How Do You Actually Utilize the Tax Credit?

Let’s assume the cost of a new solar system is $100,000. You would receive a $30,000 federal tax credit for the solar system purchase. It is important to understand that this is a federal tax credit where you offset your federal taxes, not a federal grant where you would receive money from the federal government. Therefore, if you do not owe any taxes to the federal government, you would not be able to utilize the 30% tax credit with a direct solar purchase.

In the example above, you could take the $30,000 federal tax credit from your 2016 solar installation and offset your 2016 taxes by this amount. If you couldn’t use the full $30,000 in 2016 (let’s say you could only use $22,000), you could use the remaining balance to recoup your 2015 taxes. If you still do not utilize the full $30,000, even by recouping your 2015 taxes, you can carry the balance of the tax credit forward 20 years until the full federal tax credit is expended.

Note: If you are installing a solar system on your residence, you will not be able to receive your previous year taxes back, but will typically be able to carry the balance forward to future tax years.

 

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