(NOTE: The information in this article should not be construed as tax advice. We recommend you check with your tax adviser on these credit and tax preparation questions.)
Tax season is here. For new solar owners, that may mean a significant tax credit. If you are a new solar owner it is important you understand what you can and can’t deduct as part of your new solar system.
The federal government offers a non-refundable 30% credit off your system’s purchased cost. For this tax season, this credit can be recovered for systems placed in service before the end of 2016. This credit is covered under section 25D of the IRS code. The relevant sections are 25D(d)(2), 25D(e)(2), and 25D(d)8. The Federal Tax Credit for homeowners is scheduled to lower to 26% in 2020 and 22% in 2021. It is set to expire at the end of 2023.
This credit reduces the amount of tax you will pay in the year you take the credit. Assume you paid $10,000 for a solar system and your total tax bill that year was $6,500. You would get a $3,000 tax credit. So, your final tax bill would be $3,500. Assuming that you paid taxes through withholding from your paycheck or made quarterly estimated tax payments, you would probably get money back in a refund.
Under the same scenario, let’s assume your tax bill was only $2,000. You can only take the tax credit up to zeroing out your tax liability for the year. But, you would be able to roll the remaining credit over to account for your taxes the next year, so you aren’t losing out if you can’t take the entire credit in one year.
Solar customers are able to take the tax credit starting the year their system goes into service. So, if your system was installed in December, but it wasn’t approved by the utility company to be switched on until January, the conservative approach would be to wait until the next year to claim the tax credit. Interpretations vary on the exact meaning of “in service” however. An alternate interpretation would be when the system is fully installed and tested by the installer and subsequently inspected and approved for use by your local jurisdiction.
Does that credit cover everything?
A key solar tax question is does the credit apply to structural improvements you need to make in order to complete the installation. For example, let’s say you had to make improvements to your roof as part of your installation. Is that covered?
Here’s what the IRS says: (updated June, 2020 with new IRS guidance)
In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof’s decking or rafters that serve only a roofing or structural function do not qualify for the credit.
This indicates that in most cases, a homeowner may not include the cost of roof improvements and replacement in the basis of the solar tax credit.
What you’ll owe
The tax credit only applies if you own your system. If you lease your system, the company you lease from is eligible to take the tax credit. If you own your system (you pay cash or finance your purchase through a loan), you will also own any Solar Renewable Energy Credits (SRECs) generated by the system. The money you earn from selling these SRECs is taxable. Think of this like capital gains taxes you would have to pay upon the sale of a stock.
Everyone’s system and tax situation is unique. If you have questions, you should contact a qualified tax professional.