While Congress approved a two-year extension to the federal solar tax credit (ITC) at the end of 2020, the ITC is still set to wind down and there are a lot of questions on what that means for homeowners and commercial property owners. Fortunately, there’s a lot of information available to help folks educate themselves so they can take advantage of the ITC.
We’ve gathered some of the most asked questions on how to qualify for the federal solar tax credit. Here’s what you should know about meeting the requirements.
What’s the difference between a tax credit and a deduction?
According to H&R Block, when you receive a tax credit, it reduces your tax amount and provides you with a larger refund of your withholding. This is opposed to a deduction which can only lower your taxable income and the tax rate that is used to calculate your tax. Since the ITC is a tax credit, not a deduction, it results in a larger monetary benefit to a homeowner.
What is happening with the federal solar tax credit?
At the end of 2020, Congress approved a two-year extension of the 26% federal tax credit. This allows homeowners and commercial property owners to take a credit of 26% of the total system cost for a PV solar array that is installed at their primary (or secondary) residence or commercial property. The amount was originally set to drop to 22% beginning in 2021; however, the federal solar tax credit will now remain at 26% until the beginning of 2023. Starting in 2023, it will lower to 22%. In 2024, the residential tax credit drops to 0% and 10% for commercial property owners. The commercial tax credit stays at 10% indefinitely and will benefit companies that do third party leasing of systems. While leasing has not been a good value proposition in the recent past, it may see a resurgence.
What’s the difference between the commercial and residential solar tax credit qualifiers?
The solar tax credit is set to completely sunset for homeowners after 2023 while the solar tax credit will wind down to a permanent 10% for commercial property owners.
For homeowners, the guidelines state that they must have their system installed and placed in service by the end of the 2022 to be eligible for the 26% ITC. However, for commercial projects, the protocols to claim the tax credit for 2021-2022 projects are a bit different.
Instead, the IRS established a provision to the ITC tax law called safe harbor, which allows commercial customers to preserve the tax credit of the current year by beginning construction on a solar project. To achieve safe harbor, commercial property owners must either incur 5% of total project cost or begin physical work of a significant nature on a project.
If I sign paperwork for installation of solar panels in 2021, does that mean I qualify for the federal solar tax credit?
To receive the solar tax credit at 26% , homeowners must have their solar panels installed and placed in service by the end of 2021 or 2022. Unfortunately, it isn’t enough to have a contract signed. For homeowners, the solar panels must be installed and able to operate by the end of the year. When it comes to commercial projects, however, property owners can still qualify for the 26% tax credit even if their system isn’t fully operational by the end of 2022 due to the safe harbor provision for commercial properties.
What if I don't qualify in time for the 2020 solar tax credit?
If you were unable to install solar panels by the end of 2020, you can still receive the 26% solar tax credit in 2021 and 2022 as long as your system is installed before the end of 2022. If you are interested in solar for your home, don’t wait long! Because it’s the last few years for the tax credit, installs with local solar companies are going to sell out quick. If you wait too long, you could miss out on the tax credit all together.
If I get solar panels on my rental property, does it qualify for the federal solar tax credit?
While the property doesn’t have to be your primary residence, according to Turbo Tax, you can’t claim the residential solar tax credit for installing solar panels at any rental units you own. However, your rental property may be eligible for the business ITC under IRC Section 48, according to the U.S. Department of Energy.
You also won’t qualify for the federal solar tax credit if you are a renter and your landlord installs solar panels since you must own the solar system to claim the tax credit.
Learn more about the federal solar tax credit
Interested in learning more about solar for your property and getting the federal solar tax credit? Reach out to our team of home solar advisors and find out how going solar can lead to energy independence and save you money on utilities. Our solar experts don’t work on commission, and our focus is always making sure you have the information you need to make the best decision for you and your home.