In late 2020, Congress approved a two-year extension of the 26% Federal Solar Tax Credit (ITC). This is great news for Maine homeowners and businesses planning to install a solar electric system.
The availability of the solar tax credit is a great benefit for the majority of solar customers as it essentially lowers the cost of a solar electric system by 26%! There’s a lot of information about the ITC out there, so to help, we gathered answers to some commonly asked questions about the federal tax credit.
What Is The Federal Solar Investment Tax Credit?
The solar Investment Tax Credit (ITC)—commonly referred to as the Solar Tax Credit—is offered by the federal government to people who purchase solar power systems for their homes or businesses. The ITC currently allows you to deduct 26% of the cost of installing a solar energy system from your federal taxes. The ITC applies to residential (under Section 25D) and commercial systems (under Section 48), and there is no cap on its value.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. A tax credit is a dollar-for-dollar credit applied against a tax liability. For example, if you have a $4000 federal tax liability and your solar tax credit totals $3000, you could reduce your federal tax bill to $1000.
Is the tax credit the same as a tax deduction?
It’s important to note that the ITC is a tax credit, not a deduction. When you receive a tax credit, it can be applied against the federal taxes that you owe. A tax deduction reduces your taxable income and thus can lower the amount of taxes you owe. In other words, a tax deduction lowers your taxable income.
Can anyone use the federal tax credit?
It is also important to understand that the tax credit can only be used to offset income taxes owed to the federal government. Therefore, if you don’t have a federal tax liability, you won’t be able to use the tax credit.
If the tax credit is greater than my federal taxes, will I get a tax refund?
This is a nonrefundable tax credit, which means you will not get a tax refund for the tax credit amount that exceeds your tax liability. Homeowners may get a tax refund at the end of the year due to the tax credit if the reduction in tax liability means there was overpayment during the year. For example, this can often occur when employers deduct taxes for employees over the course of the year. However, such a refund is still limited by the taxpayer’s total tax liability.
However, your tax credit can be carried forward. Note that this tax credit carryover can only happen during the period the IRS solar tax credit is in effect, so under the current rules, you would need to use the full credit by the time the credit expires on January 1, 2024.
How long will the Federal Solar Tax Credit be available?
The solar federal tax credit was set to decline to 22% in 2021 but was extended at 26% for an additional two years. As a result, solar photovoltaic systems (and paired battery backup systems) currently qualify for a 26% federal tax credit when installed in 2021and 2022. The tax credit then steps down according to the following schedule:
- 26% for solar projects completed in 2021 & 2022
- 22% for solar projects completed in 2023
- After 2023, the residential tax credit drops to zero while the commercial credit drops to 10%
What qualifies for the federal solar tax?
Grid tied and off-grid solar electric and battery based energy storage systems.
- Solar electric panels
- Labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees
- Balance-of-system equipment, including wiring, inverters, and mounting equipment
- Batteries (energy storage devices) that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed
- Sales taxes on eligible expenses
Do batteries qualify for the tax credit?
Yes. Battery systems, like the Tesla Powerwall, are eligible for the solar tax credit, as long as the battery is charged on-site by your solar array. If you don’t have solar panels and plan on installing a back-up battery that will be charged with electricity from the grid it would not qualify for a tax credit..
How do I qualify for the 26% federal solar tax credit?
- The solar electric system must be installed on or before December 31, 2022.
- The solar electric system is located on your property. The home does not need to be your main home. It can be your primary or a secondary residence.
- You must own the solar electric system (i.e., purchased it directly or through financing. Leased systems or solar power subscriptions do not qualify).
How can I claim the federal solar tax credit?
After seeking professional tax advice and ensuring you are eligible for the credit, you can complete and attach IRS Form 5695 to your federal tax return (Form 1040 or Form 1040NR). Instructions on filling out the form are available here.
Is there a state solar tax credit?
Maine does not offer a state income tax credit for solar electric systems.
Do I still have time to schedule an install so that I can claim the tax credit this year?
The growing popularity of solar electric systems coupled with the scheduled reduction and expiration of the federal tax credit means that installation schedules are filling earlier every year. If you want to see if a solar electric system is right for you, the time to act is now!
Maine Solar Solutions goal is to provide you with the information you need to make an informed decision. There is never any pressure or obligation. Schedule a free solar site assessment and consultation today!
DISCLAIMER: This guide provides an overview of the federal investment tax credit for those interested in residential solar photovoltaics, or PV. Maine Solar Solutions does not provide professional tax advice or financial guidance. Please consult with a tax professional.