Solar Investment Tax Credit - FAQs

The Federal Solar ITC is the most significant solar incentive in the United States. This guide breaks it down for you.

(Disclaimer: We are solar nerds, not tax nerds. Please consult a tax professional for authoritative advice on this issue.)

The Solar Investment Tax Credit is a federal tax credit you can get for installing renewable energy technology at your house or business. This includes solar electric (ie. solar panels), solar hot water, small wind turbines, and geothermal heat pumps.

It’s known as the Residential Energy Credit if you’re a homeowner, and the Investment Credit if you’re a business.

In 2020, the tax credit is worth 26% of the total cost of your system. The credit drops over time: it was 30% in previous years, and in 2022 it will drop to 22%. After 2022, the credit will disappear for homeowners, but remain at 10% for businesses.

Date installation completedRebate
up to 12/31/201930%
calendar year 2020 and 202126%
calendar year 202222%
after 20220% for residential solar, 10% for businesses

How is the solar tax credit calculated?

The tax credit is calculated as 26% of the total system price. “Total system price” means the final price on the invoice that you get from your solar installer. That includes labor costs and all the components of a photovoltaic system, including solar panels, racking, wiring, and the inverters. All of those costs are eligible for the credit.

If you’re doing a ground-mounted system, the foundation work and mounting system are eligible too.

However, some work that may be required to install solar on your home cannot be included in the credit. For example, if your roof requires repairs before you install solar, you can’t claim that repair work for the credit.

Exactly what is eligible for the tax credit?

This is a renewable energy credit, so many technologies other than solar photovoltaics are eligible. Here’s a complete list:

Solar photovoltaics. This means good old solar panels and their supporting equipment. In the IRS instructions for the tax credit, photovoltaics are described as solar electric property. They also make a point of including solar shingles, such the Tesla Solar Roof.

Solar water heating. There are types of solar collectors that use the sun’s energy to directly heat hot water, which can then be used to supply hot water for the home or used for space heating. Supporting equipment, like racking, is included in the eligible costs. The equipment must be rated by the Solar Rating Certification Corporation or an equivalent agency to qualify.

Small wind turbines. While not nearly as popular as solar panels in urban settings, in more rural areas using small wind - also known as micro wind - turbines to generate electricity is gaining in popularity. Unlike for other technologies, the IRS doesn’t have much in the way of restrictive language about what qualifies. In practice, “small” wind turbines that a homeowner would install are going to top out at around 25 kW in size.

Geothermal heat pumps. Also known as ground-source heat pumps, you could think of these devices as backwards air conditioners: they draw heat from the outside and pull it inside your home. They can work as air conditioners too. Air source heat pumps are more popular, but geothermal pumps that use coils buried up to a few hundred feet underground are more energy efficient. They’re also significantly more expensive, so this tax credit is a big help.

Fuel cells. Fuel cells turn hydrogen directly into electricity. There was a time when hydrogen fuel cells were a really promising technology, but they haven’t panned out. Instead, lithium-ion batteries have filled that role. Only a few of these devices were sold for the home market in Japan. I’m not aware of any currently available for sale in the US.

Are home batteries eligible for the tax credit?

The Solar ITC was introduced in 2006, before lithium-ion home energy storage batteries like the Tesla Powerwall came onto the market. Back then, hydrogen fuel cells were the technology that a lot of people were betting on.

Because of this, in the IRS instructions for the tax credit, there’s no language that addresses home storage batteries, even though they currently fill the same role that fuel cells were intended to.

Thankfully, the IRS has issued a clarification and the news is good: home solar batteries are eligible for the tax credit.

However, there is an important caveat. In order to qualify, the battery can only be charged with electricity generated by the solar panels. Any use of grid electricity to charge the battery disqualifies you from claiming the credit.

In practice, this is difficult to enforce. Home solar systems are grid-connected, and batteries like the Tesla Powerwall can be charged with either solar or grid electricity by selecting different operating modes. However, solar homeowners will usually want to charge their battery with midday solar electricity that they “spend” during peak hours in the early evening because of the effect of time-of-use rates.

There’s more to know about rebates and tax credits for solar batteries, including local rebates, so we wrote an extensive article that tells you everything you need to know.

How does the credit work?

You get the credit as a reduction of your tax bill. It is not paid out to you directly in full. For example, if your ITC credit is $5,000, but your tax bill is only $4,000, you get a maximum benefit of $4,000. However, you can carry forward any unused credits to the next year. Please consult with a tax professional for more details.

How do you apply for the solar tax credit?

It’s actually pretty simple. The form is only 2 pages long, but when applying for credits for solar panels or the other technologies mentioned above, you only need to pay attention to the first page.

The second part of the form, somewhat confusingly labelled Nonbusiness Energy Property Credit, is used when you have energy efficiency improvements to claim, such as insulation or high efficiency appliances.

This means you only need to pay attention to Part I of the form, and that form only has a couple lines to fill out. The first is simply the invoice price of your system, and the second bit is to figure out if you need to carry forward any unused credits.

What happens with unused credits?

When you fill out the form, line 14 of the form asks you to figure out if your ITC credit is greater than the tax you owe. If it is, don’t worry. The credit won’t be wasted because you can carry forward any unused credits to the next year.

To figure out line 14, there’s a little worksheet included in the instruction booklet for the form - it’s part of the form itself.

Can the credit be taken on a second home?

Yes. The equipment doesn’t have to be installed on your primary or main home. If you’re the homeowner, you’re eligible for the credit.

The instructions in the IRS form are slightly confusing because there’s a section that defines what a “main home” is. However, only the tax credit for fuel cells restricts you to claiming the credit for your main home. All other technologies, including solar panels, don’t have this restriction.

Can I take advantage of the ITC in addition to state or local credits?

In all cases that we are aware of - yes. Taking the ITC does not prevent you from also receiving rebates offered by your state, municipality, or utility.

What are the deadlines for taking advantage of the credit?

You apply for the credit in your tax return after the system is placed into service.

The date that the system is placed into service is also relevant if you’re on the cusp of a year in which the credit steps down. For example, the credit steps down from 30% to 26% on January 1, 2020. This means that your system needed to be switched on and generating electricity on December 31, 2019 in order to claim the 30% credit. Similar deadlines will apply as the credit steps down to 22% and eventually 0%.

Which are the relevant IRS forms?

Use Form 5696 for residential (home) solar.

Use Form 3468 for commercial solar.

Will the Solar ITC be extended?

A renewal would require an act of Congress. It has been renewed before, most recently by the Bipartisan Budget Act of 2018. Even so, the credit is due to expire completely for homeowners by 2023.

The most recent effort to extend the ITC again ended in December 2019 when a proposed extension was removed from the annual House spending package.

An extension is highly unlikely under the Trump administration and with the Senate under Republican control. However, all current candidates for the Democratic presidential nominee race support renewable energy, so it’s quite possible that the next administration will extend the tax credit again.

Has the Solar ITC been a good thing for solar?

It absolutely has. While we can’t know for sure what would have happened to the solar industry if the ITC wasn’t in place, we do know that the solar industry has grown by a staggering total of 10,000%, or more than 50% every year since the ITC was enacted in 2006.

While solar costs will likely continue to drop even after the ITC expires, there’s little doubt that losing the credit will slow the growth of solar. You can read more from the Solar Energy Industries Association, an industry advocacy group.

Where can I learn more?

Follow the links above for the relevant IRS form and read the associated instructions. It’s worthwhile reading because in addition to solar electric, many other renewable energy technologies are covered, as well as energy efficiency improvements such as insulation and windows.



TAGS:
#Incentives #Taxes

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