How the Federal Solar Tax Credit Works

Oct 20, 2015Blog

solar tax credit

There are many benefits that come with utilizing solar energy. One of them is the potential for a solar credit on your federal taxes. The tax credit allows you to subtract 30 percent of the cost of your solar energy system from that year’s tax bill.

Here’s how it works, which differs for businesses and homeowners:

Homeowners – Figure out the gross cost of installing your solar system, then take away any state and utility rebates. Multiple the number you are left with by 30 percent, which gives you the amount of the tax credit you are eligible for. It’s important to note that if you installed your solar system with a solar lease or a solar power purchase agreement (PPA), you are not eligible for the solar tax credit.

Businesses – For businesses installing commercial solar projects, the rebate is calculated on the gross installed cost of the solar system (before deducting any local or utility rebates).

First and foremost, you must owe taxes to the federal government. If you owe an amount smaller than the credit, you can only be credited up to that dollar amount for that year. The good news is the rest of that credit amount can still be obtained over subsequent years, by rolling the credit over to the next year for as many as five years.

Costs That are Included

What’s included in the credit amount is generally what you would expect: Anything related to installation, including parts and labor. But there’s more. An electrical panel box upgrade and even any maintenance or adjustments to your roof can be included in the credit as well.

Tax Credit vs Tax Deduction

If you’re not particularly tax savvy, that’s okay… it’s why we hire tax accountants to take care of it for us. That said, it’s important to make sure you understand the difference between a tax credit and a tax deduction.

Simply put, with a tax deduction, you’re taking that amount off your taxable income. With a tax credit, that amount is subtracted from the amount you owe. While we’re not tax accountants, and don’t want to be giving you financial advice, if you compare the two, the tax credit will almost always be the favorable outcome.

What Kind of Dwelling Qualifies for the Credit?

Do you have an RV? The law governing the federal tax credit states the following:

“The term ‘qualified solar electric property expenditure’ means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.”

The IRS defines a dwelling unit as such:

A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. It also includes all structures or other property belonging to the dwelling unit. A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities.

Here are some additional things to consider:

  • There is no ceiling on the solar tax credit.
  • The property does not have to be your primary residence to receive the tax credit.
  • If you have an existing solar PV system, but want to upgrade or expand upon it, that expense can qualify for a tax credit.

Does this sound enticing to you? Well, you don’t have a lot of time to waste. The credit is only available for systems that are installed by 2016.