Inflation Reduction Act: what it means for home solar

After the death of the Build Back Better bill, a pared back climate bill that also died, machinations in the senate, and an unexpected last minute back-from-the-dead effort, President Biden signed the Investment Reduction Act this week.

It’s being called the largest investment in combatting climate ever and the most significant environmental legislation since the Clean Air Act.

The IRA covers a large swath of things intended to lower the cost of energy and prescription drugs, of which are outside the scope of this blog. However, the federal tax incentive for solar has played a big role in the rapid adoption of solar energy. Without intervention by Congress, that tax credit was set to drop to 22% next year and disappear completely for homeowners the year after that.

Fortunately, the IRA both increases the tax credit and extends it. For homeowners who are thinking about going solar, this is a big flippin’ deal.

What does the Investment Reduction Act do for home solar tax credits?

The IRA increases the solar investment tax credit to 30% and doesn’t start to phase out the credit until 2033. This tax credit works the same way it did before, so homeowners will still file Form 5696. (You can read our article on the solar ITC for more details.)

Previously, the residential solar tax credit was 26%, set to drop to 22% in 2023, and was going to expire in 2024.

One important detail is that any installation installed after January 1, 2022 will qualify for the 30% credit. This means that if you just installed your system this year, you didn’t miss out on a 4% tax credit increase.

The tax credit extension also means that homeowners don’t have to rush to complete their installation before getting hit with a lower tax credit next year.

Small commericial installations - those under 1 megawatt AC - also get the 30% tax credit.

When do solar tax credits expire under the IRA?

Homeowners now have the full 30% tax credit available until 2032. The tax credit will drop to 26% in 2033, 22% in 2034, and 0% in 2035.

For commercial installations, the 30% tax credit is extended until 2033, dropping to 22.5% in 2034, 15% in 2035, and will be phased out in 2036.

Home batteries get the tax credit too

While home storage batteries, which are being installed more frequently by solar homeowners, have been eligible for the solar tax credit, the rule around that was never formalized in the law itself. The IRS made it clear that batteries could qualify, but only in a note published in 2018.

The IRA helpfully clarifies that home battery storage does indeed qualify for the 30% tax credit, with the caveat that the system must have a capacity of not less than 3 kilowatt-hours.

Because the smallest lithium battery that’s aimed at the solar market is the Enphase IQ3 with a capacity of 3.36 kWh, all the mainstream batteries will meet the requirement for this credit.

You can read more about battery rebates in this article.

There’s lots more too

The solar incentives are just part of what’s in the IRA. It also includes provisions for energy efficiency upgrades, installing green appliances like heat pumps, and even upgrading your electric panel to support the increased load that comes with electrification.

There’s also changes in the tax credit for electric vehicles, which are intended to support domestic vehicle and battery manufacturing. Some EV manufacturers will benefit in the short term, while others will see their EV tax credits go away.

These are all pretty big topics that we may cover in a future article. For now, the home solar industry has a lot to be thankful for with the passage of the IRA.