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How Does The Federal Solar Tax Credit Work?

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 30% 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 30% of the system cost from owed taxes.

 

2019 is the final year for the full 30% tax credit. The credit will step down to 26% in 2020, 22% in 2021, and 10% in 2022 for businesses, where it will remain permanently. 2021 will be the last year for homeowners to claim any tax credit.

 

Federal Solar Tax Credit_Step Down

 

Although going from 30% to 26% 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 30% 26% 22% 10%
Residential $20,000 $6,000 $5,200
(-$800)
$4,400
(-$1,600)
$0
(-$6,000)
Commercial $100,000 $30,000 $26,000
(-$4,000)
$22,000
(-$8,000)
$10,000
(-$20,000)

 

That’s $800 that could be reinvested into your home or $4,000 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 $30,000. 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 $30,000.  

 

In the example above, you could reduce your 2019 taxes by $30,000. If you can’t use the full $30,000 in 2019 (maybe you only owe $20,000 in taxes), you could use the remaining $10,000 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 $30,000 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 $10,000 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 $10,000 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 30% credit regardless of your system’s cost.

Additional Tax Benefits for Businesses and Farms

 

For businesses, the tax benefits extend beyond the 30% 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 30% tax credit.

 

Originally published December 7, 2016, updated January 10, 2019.

 

Andy Schell

Andy is the Marketing Manager at Paradise Energy Solutions, working from our corporate headquarters in Paradise, PA.

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