Federal Solar Tax Credit Extended through 2024
One of the single best reasons to not wait too long to install solar panels is the solar tax credit offered by the federal government. This tax credit is known as the Investment Tax Credit, or ITC.
There are other credits and tax benefits for solar to be found in certain states. And, agricultural solar installations, as well as rural businesses, can often get access to more money through the REAP Grant.
But the federal solar tax credit remains the single biggest pot of money related to solar installations.
Solar Tax Credit History
The ITC began in 2005. It applies to residences, commercial businesses, agricultural businesses, and utilities. There is no cap, meaning even a multi-million dollar solar installation can claim the same credit.
And to be clear, this is a tax credit, not a tax deduction. A deduction just lowers your taxable income. But a credit is a direct, dollar for dollar reduction of your tax bill. So a credit is way better than a deduction.
The ITC was originally meant to expire just two years after it began. But like many things in government, once it got started, it never stopped. The ITC has been renewed and updated multiple times. However, there was great uncertainty about whether that would happen this time around.
Up until 2019, the solar tax credit had been at 30% under the ITC. For residential solar installations in 2020, the credit dropped to 26%. And originally, it was scheduled to drop to 22% in 2021, 10% in 2022, and then be gone for good after that.
For commercial and utility solar installations, the plan was the same except that the 10% credit would remain in effect indefinitely.
What Is the Update on the Solar Tax Credit?
As 2020 was coming to a close, Congress and the president finally agreed on a new spending and stimulus bill, and it included an extension of the investment tax credit by two years.
What this means for you:
- The 26% tax credit has been extended by two years, through 2022
- The 22% credit will now kick in on Jan 1, 2023
- The 10% credit will start on Jan 1, 2024
- The ITC will expire for residential solar on Dec 31st, 2024, unless it gets extended again
- Commercial and agricultural solar follow this same plan, as before, and the 10% credit then continues indefinitely after 2024
That means that if you install a $20,000 residential or business solar system before the end of 2022, you would receive $5200 of that back the next time you file taxes. If you have a poultry farm, a hotel, or another business with capacity for a much larger system, the credit is the same. If you install a $150,000 system, you would get $39,000 back.
Who Can Claim the Solar Investment Tax Credit?
Any residence, business, farm, or utility can claim the federal ITC as long as they own the solar energy system they are installing.
So, if you’re paying for the system all up front or if you are financing it, you own the system and you can claim the tax credit. If you are doing a solar lease, or a PPA (power purchasing agreement), that means someone else owns the system, and you cannot claim the tax credit.
What about solar batteries?
The ITC as written does not include the cost of solar batteries.
However, it’s a little more complicated than that because of some amendments that were made a few years back. But these amendments have very specific language. See this article for more details if getting into the weeds is your thing, or if you are interested in solar batteries and want to apply the tax credit to them.
How to Claim the Solar Investment Tax Credit
Claiming the tax credit is fairly simple, though it can come with one complication. First, the simple part:
If you’re filing your own taxes, you will need a Form 5695. You can access the form and the instructions here.
If you’re using a tax accountant, you will need to inform them you installed your solar energy system last year. Don’t forget to do that step! They won’t be informed by the government or anyone else, so if you forget to tell them, you won’t get the credit this year.
Send them your solar invoice that lists the total cost of the project, and they will do the rest.
Now here’s the small complication: Before you sign off on your tax return, ask your accountant to explain how much of the credit you got this year, and if any of it will be rolled over to next year.
This can happen sometimes if the credit is larger than your total tax owed for the year. In other words, if you owe $5000 in taxes but get a $7000 solar tax credit, you would have to carry over the remaining $2000 credit to the following tax year. Your accountant can explain all this to you.
What Should I Do if I Haven’t Installed Solar Panels Yet?
The most important thing to take from all this is – if you haven’t yet installed solar panels but have been wanting to, get it done within the next two years so you can be sure of receiving the maximum allowable solar tax credit. 10% is okay. 22% is pretty good. But 26% is better.
Use the button below to request a free solar consultation and quote from Coastal Solar, and get all your questions answered to see if going solar is a good move for your house, farm, hotel, or other business.