Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics Photo credit Dennis Schroeder, NREL Disclaimer: This guide provides an overview of the federal investment • Your solar PV system was installed tax credit for those interested in What is the federal solar between January 1, 2006, and residential solar photovoltaics, or PV. tax credit? December 31, 2023. It does not constitute professional • The federal residential solar energy • The solar PV system is located at tax advice or other professional credit is a tax credit that can be your primary or secondary residence claimed on federal income taxes for financial guidance. And it should in the United States, or for an off-site a percentage of the cost of a solar not be used as the only source of community solar project, if the photovoltaic (PV) system.2 (Other electricity generated is credited against, information when making purchasing types of renewable energy are also and does not exceed, your home’s decisions, investment decisions, or eligible for similar credits but are electricity consumption.5 tax decisions, or when executing other beyond the scope of this guidance.) binding agreements. • You own the solar PV system (i.e., • The system must be placed in service you purchased it with cash or through during the tax year and generate financing but you are neither leasing What is a tax credit? electricity for a home located in the nor are in an arrangement to purchase A tax credit is a dollar-for-dollar United States. There is no bright-line electricity generated by a system you reduction in the amount of income tax test from the IRS on what constitutes do not own). you would otherwise owe. For example, “placed in service,” but the IRS has 3 claiming a $1,000 federal tax credit equated it with completed installation. • The solar PV system is new or being reduces your federal income taxes used for the first time. The credit 1 • In December 2020, Congress passed due by $1,000. can only be claimed on the “original an extension of the ITC, which installation” of the solar equipment. provides a 26% tax credit for systems The U.S. Department of Energy installed in 2020-2022, and 22% for Solar Energy Technologies systems installed in 2023.4 The tax What expenses are included? Office supports early-stage credit expires starting in 2024 unless The following expenses are included: Congress renews it. research and development • Solar PV panels or PV cells used to improve the affordability, • There is no maximum amount that to power an attic fan (but not the reliability, and performance of can be claimed. fan itself) solar technologies on the grid. • Contractor labor costs for onsite The office invests in innovative Am I eligible to claim the preparation, assembly, or original research efforts that securely federal solar tax credit? installation, including permitting fees, integrate more solar energy into You might be eligible for this tax credit inspection costs, and developer fees the grid, enhance the use and if you meet all of the following criteria: • Balance-of-system equipment, storage of solar energy, and lower including wiring, inverters, and solar electricity costs. mounting equipment 2
• Energy storage devices that are Rebate from My State Government not 25% + 26% = 51%). For an $18,000 charged exclusively by the associated Unlike utility rebates, rebates from state system, the total cost reduction in this solar PV panels, even if the storage is governments generally do not reduce example would be: placed in service in a subsequent tax your federal tax credit. For example, year to when the solar energy system [$18,000 * 0.26] + [$18,000 * (1 – if your solar PV system was installed 0.22) * (0.25)] is installed (however, the energy before December 31, 2022, installation storage devices are still subject to the costs totaled $18,000, and your state = $4,680 + $3,510 installation date requirements)6 government gave you a one-time rebate of $1,000 for installing the system, your = $8,190 • Sales taxes on eligible expenses. federal tax credit would be calculated as follows: Can I claim the credit, How do other incentives 0.26 * $18,000 = $4,680 assuming I meet all I receive affect the federal requirements, if … tax credit? State Tax Credit For current information on incentives, State tax credits for installing solar …I am not a homeowner? PV generally do not reduce federal tax including incentive-specific contact Yes. You do not necessarily have to be credits—and vice versa. However, when information, visit the Database of State a homeowner to claim the tax credit. you receive a state tax credit, the taxable Incentives for Renewables and Efficiency A tenant-stockholder at a cooperative income you report on your federal taxes website at www.dsireusa.org. housing corporation and members of will be higher than it otherwise would condominiums are still eligible for the have been because you now have less tax credit if they contribute to the costs of Rebate from My Electric Utility to state income tax to deduct.9 The end an eligible solar PV system. In this case, Install Solar result of claiming a state tax credit is the amount you spend contributing to the Under most circumstances, subsidies that the amount of the state tax credit is cost of the solar PV system would be the provided by your utility to you to install effectively taxed at the federal tax level. amount you would use to calculate your a solar PV system are excluded from tax credit. However, you cannot claim income taxes through an exemption For example, the net percentage reduction a tax credit if you are a renter and your in federal law.7 When this is the case, for a homeowner in New York who landlord installs a solar system, since you the utility rebate for installing solar claims both the 25% state tax credit10 and must be an owner of the system to claim is subtracted from your system costs the 26% federal tax credit for an $18,000 the tax credit. before you calculate your tax credit. For system is calculated as follows, assuming example, if your solar PV system was a federal income tax rate of 22%: installed before December 31, 2022, …I installed solar PV on my 0.26 + (1 – 0.22) * (0.25) = 45.5% cost $18,000, and your utility gave you a vacation home in the United one-time rebate of $1,000 for installing States? Note that because reducing state income the system, your tax credit would be Yes. Solar PV systems do not necessarily taxes increases federal income taxes paid, calculated as follows: have to be installed on your primary the two tax credits are not additive (i.e., 0.26 * ($18,000 - $1,000) = $4,420
Payment for Renewable Energy Certificates When your utility, or other buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental attributes of the electricity generated (either upfront or over time), the payment likely will be considered taxable income.8 If that is the case, the payment will increase your gross income, but it will not reduce the federal solar tax credit. Solar PV system on a home in the Ozark Mountains. Photo credit Douglas Hutchings. 3
residence for you to claim the tax credit. Yes. If you financed the system through have passive income against which the However, the residential federal solar tax the seller of the system and you are credit can be claimed.14 credit cannot be claimed when you put a contractually obligated to pay the full solar PV system on a rental unit you own, cost of the system, you can claim the Other Frequently Asked though it may be eligible for the business federal solar tax credit based on the ITC under IRC Section 48.11 full cost of the system. Miscellaneous Questions expenses, including interest owed on If the tax credit exceeds my tax …I am not connected to the electric financing, origination fees, and extended liability, will I get a refund? grid? warranty expenses are not eligible expenses when calculating your tax This is a nonrefundable tax credit, which Yes. A solar PV system does not credit. means you will not get a tax refund for necessarily have to be connected to the amount of the tax credit that exceeds the electric grid for you to claim the your tax liability.15 However, you can residential federal solar tax credit, as long …I bought solar panels but have carry over any unused amount of tax as it is generating electricity for use at not installed them yet? credit to the next tax year. your residence. No. The tax credit is only for systems that were “placed in service” during the year, Can I use the tax credit against the …the solar PV panels are on my meaning they are installed and producing alternative minimum tax? electricity for the homeowner. property but not on my roof? Yes. The tax credit can be used against Yes. The solar PV panels located on either the federal income tax or the your property do not necessarily have …I participate in an off-site alternative minimum tax. to be installed on your roof, as long as community solar program? they generate electricity for use at your The answer depends heavily on your I bought a new house that was residence. specific circumstances. The IRS states constructed in 2020 but I did not in Questions 25 and 26 in its Q&A on move in until 2021. May I claim a …I have a home office (or my Tax Credits13 that off-site solar panels tax credit if it came with solar PV residence is also used for a or solar panels that are not directly on already installed? commercial purpose)? the taxpayer’s home could still qualify Yes. Generally, you can claim a tax credit Yes, but if the residence where you for the residential federal solar tax credit on the expenses related to the new solar install a solar PV system serves multiple under some circumstances. However, PV system that already came installed purposes (e.g., you have a home office community solar programs can be on the house for the year in which you or your business is located in the same structured in various ways, and even if moved into the house (assuming the building), claiming the tax credit you are eligible for the tax credit, it may builder did not claim the tax credit)—in can be more complicated. When the be difficult to claim due to other tax rules. other words, you may claim the credit amount spent on the solar PV system is For example, one arrangement is the in 2021. For example, you can ask the mostly used for residential rather than creation of a “special purpose entity,” builder to make a reasonable allocation business purposes, the residential credit where community members form for these costs for purposes of calculating may be claimed in full without added and invest in a business that operates your tax credit. complications. However, if less than the community solar project. If your 80% of the solar PV system cost is a participation is limited to investing in the How do I claim the federal residential expense, only the percentage community solar project and you do not that is residential spending can be used participate in the operation of the project solar tax credit? to calculate the federal solar tax credit on a regular, continuous, and substantial After seeking professional tax advice and for the individual’s tax return; the portion basis, you are constrained in taking ensuring you are eligible for the credit, that is a business expense could be advantage of the credit because you are you can complete and attach IRS Form eligible for a similar commercial ITC on considered a “passive investor.” IRS rules 569516 to your federal tax return (Form 12 the business’s tax return. require that a tax credit associated with a 1040 or Form 1040NR). Instructions passive investment only be used against on filling out the form are available at …I financed my solar PV system passive income tax liability, which only http://www.irs.gov/pub/irs-pdf/i5695.pdf instead of paying for it upfront? applies to income generated from either a (“Instructions for Form 5695,” IRS). (If so, how do I treat interest, rental activity or a business in which the origination fees, and extended individual does not materially participate. warranty expenses?) Many homeowners will therefore not 4
A rooftop array perched on a coastal hill on the island of Vinalhaven in Maine. Photo credit William Byers.
Where can I find more information? 8 IRS. 2010, September 3. IRS private letter ruling 201035003. http://www.irs.gov/pub/ irs-wd/1035003.pdf. Note: A private letter ruling may not be relied on as precedent by Ask Questions other taxpayers.
Internal Revenue Service (IRS), 1111 Constitution Avenue, 9 The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on state and local tax N.W., Washington, D.C. 20224, (800)829-1040. deduction, which may impact whether a state tax credit impacts federal taxable income.
10 New York’s 25% state tax credit is capped at $5,000 for solar energy systems, regardless of cost, according to DSIRE (https://programs.dsireusa.org/system/program/ Find Resources detail/80).
• The federal statute and IRS guidance: 26 USC § 25D at www. 11 See 26 U.S.C. § 25D(d)(2), which specifies that eligible solar electric property gpo.gov and “Q&A on Tax Credits for Sections 25C and 25D” expenditures must be “for use at a dwelling unit located in the United States and used as a residence by the taxpayer” (emphasis added). at www.irs.gov. 12 IRS. “Instructions for Form 5695.” https://www.irs.gov/instructions/i5695. • Updated information on the current status of the ITC: 13 IRS. “Q&A on Tax Credits for Sections 25C and 25D.” Notice 2013-70. https://www.irs. Database of State Incentives for Renewables and Efficiency gov/pub/irs-drop/n-13-70.pdf. entry on “Residential Renewable Energy Tax Credit” 14 Jason Coughlin, Jennifer Grove, Linda Irvine, Janet F. Jacobs, Sarah Johnson Phillips, at www.dsireusa.org. Leslie Moynihan, and Joseph Wiedman. 2010, November. A Guide to Community Solar: Utility, Private, and Non-Profit Project Development. http://www.nrel.gov/docs/ fy12osti/54570.pdf. Endnotes 15 Homeowners may get a tax refund at the end of the year due to the tax credit, if the reduction in tax liability means there was overpayment during the year. This can often occur when employers deduct taxes for employees over the course of the year. However, 1 The federal tax credit is sometimes referred to as an Investment Tax Credit, or ITC, such refund is still limited by the taxpayer’s total tax liability. though is different from the ITC offered to businesses that own solar systems. 16 IRS, “About Form 5695, Residential Energy Credits,” https://www.irs.gov/forms-pubs/ 2 26 U.S.C. § 25D, https://www.govinfo.gov/app/details/USCODE-2011-title26/USCODE- about-form-5695. 2011-title26-subtitleA-chap1-subchapA-partIV-subpartA-sec25D.
3 IRS. 2018, March 2. IRS private letter ruling 201809003. https://www.irs.gov/pub/ irs-wd/201809003.pdf. Note: A private letter ruling may not be relied on as precedent by other taxpayers.
4 Systems installed before December 31, 2019 were eligible for a 30% tax credit.
5 The IRS has permitted a taxpayer to claim a section 25D tax credit for purchase of a portion of a community solar project (IRS. 2015, September 4. IRS private letter ruling 201536017. https://www.irs.gov/pub/irs-wd/201536017.pdf. Note: A private letter ruling may not be relied on as precedent by other taxpayers.)
6 Isaac L. Maron. 2018, March 26. “Residential Solar Storage is Eligible for Tax Credit, Subject to a 100% Cliff.” Tax Equity Times. https://www.taxequitytimes.com/2018/03/ residential-solar-storage-eligible-tax-credit-subject-100-cliff/. Note: A private letter ruling may not be relied on as precedent by other taxpayers. SOLAR ENERGY TECHNOLOGIES OFFICE
7 26 U.S.C. § 136, https://www.govinfo.gov/app/details/USCODE-2011-title26/USCODE- For more information, visit: energy.gov/eere/solar 2011-title26-subtitleA-chap1-subchapB-partIII-sec136. DOE/EE-2315 • January 2021