Residential solar is booming in popularity. It helps you both lower your bills and reduce your carbon footprint so what’s not to love? If you’re searching for a way to save even more though, let’s talk about the solar tax credit and see if it makes sense for you.
Here’s a few of the questions that should be answered so that you can make the most informed decision possible related to a home solar energy system:
- What Is The Solar Tax Credit?
- How Can You Qualify For This Tax Credit?
- Who Can Claim This Tax Credit?
- Is This Tax Credit For Solar Worth It?
- Can You Receive The Tax Credit If You Lease A Solar Power System?
What Is Solar Tax Credit?
The Federal Investment Tax Credit (ITC) for solar systems is a financial incentive designed to encourage the adoption of solar energy by homeowners, businesses and utilities alike.
The ITC is a means of reducing the total up front cost of the solar system by taking a credit on the following year’s tax return. Currently, the Federal ITC is equal to 30% of the total cost of an installed solar system for a homeowner or business. This applies to all necessary equipment and installation costs for the solar energy system.
It should be noted that the Federal ITC is only scheduled to remain at 30% for the remainder of 2019. This means that as long as all proper permits have been obtained and construction has begun on a solar project by December 31st, 2019, it is fully eligible for the full 30% Investment Tax Credit in the following tax year.
After 2019, the Federal ITC begins to step down year after year. The 2020 Federal ITC is slated to fall to 26%. Then, in 2021 the Federal ITC will fall to 22%. Finally, projects which begin construction beginning January 1st, 2022 or later will receive a Federal ITC of just 10%.
The reason that the Federal ITC begins to drop after this year is to better follow the declining cost of solar power so that it may continue to be cost competitive with other forms of power generation.
Luckily, there are already many case studies which demonstrate the cost effectiveness and viability of solar without any use of subsidies. To that end, any subsidy currently available is only a further cost savings for the consumer. Finally, it should be noted that these Federal ITC guidelines are subject to change based on legislation changes to the federal solar program and willingness to continue the investment in pushing toward more renewable energy technologies.
How To Qualify For This Tax Credit?
Any homeowner or business entity that purchases their solar system outright can qualify for this solar tax credit. The purchase of the system is a key point to note because only the owner of the system can receive the tax credit.
In the field of solar, this sometimes is or is not the same person who owns the roof or ground on which the solar system sits. In order to be able to fully claim this tax credit, it is important to remember that you must have tax liability at least equal to the value of the tax credit for your solar system. If your tax liability is less than this amount, the maximum value of the tax credit will be equal to this lesser amount. However, you can roll the remaining tax credit to the following year.
Unfortunately, if you decide to lease your system as opposed to owning it, you will not be eligible to take the Investment Tax Credit on your following year’s taxes. Luckily, there are a variety of other benefits to leasing a solar system which we’ll get into more later.
Who Can Claim This Tax Credit?
Only the owner of the solar power system can claim the tax credit. If you purchase the full system on your home, you are the owner of the solar array. If you lease the solar energy system on your home from a solar company, that business is the legal owner of the solar system and they’re the ones who get to claim this tax credit.
There are a variety of cases where a third party may own a solar system that is located on top or adjacent to someone’s home or business. This may include terms such as a power purchase agreement (PPA) where the site owner agrees to pay the solar system owner a fixed price for the energy that the solar system generates.
To give you an example on what you can save, if you outright purchase a solar system for a total cost of $11,000, you can receive a tax credit on the following year’s taxes equal to $3,300 making your total out of pocket cost after the first year just $7,700. Not a bad price for a system that lasts 25 or more years.
Is This Tax Credit Worth It?
The tax credit for the purchase of a new solar system is absolutely worth it. Let’s look at an example to prove it. A home solar energy system rated at 5 kilowatts may cost around $15,000 and have an average energy output of roughly 6,400 kilowatt hours per year.
The annual benefit of a system of this size would be about $2,500 / year. That means this system would take about 6 years to be paid off. And this is before the tax credit.
Next, we do the same calculation, but this time, we include the current 30% Investment Tax Credit. Now, the system only has a cost of $10,500 after getting a tax refund for the other $4,500.
At the same savings level, the payback period is only 4.2 years. This represents shortening the payback period by almost 2 years. It should be noted that if you have a higher cost of electricity or are eligible for additional incentives for your solar system, this payback period can be even further reduced.
Solar Leases and Tax Credit
Leasing a solar system from another business takes away your ability to claim the tax credit. While a tax credit may be the only way that some consumers agree to purchase the system, solar leases do have some benefits of their own.
The first is that some solar leases require no down payment for the installation of the system. The cost of the system then comes to the homeowner in the form of a monthly price agreed upon by both parties prior to construction. Another great benefit to leasing the panels is that the company that owns the system is responsible for all the maintenance.
If you were to own the system, all these costs would fall squarely on your shoulders. A final benefit to leasing the system is shorter lease terms. This way, if technology rapidly improves, the terms of the lease can be renegotiated.
Final Thoughts
Taking the tax credit for a solar system is completely worth it. Not only are you installing a system that will help to lower your energy bills and do some good for the environment, but you are also reducing the cost by almost one third and shortening your payback period on the road to utilizing clean energy.
