Federal Solar Tax Credit 2023: What It Is & How Does It Work
Solar PV systems are a major investment, but they can offer a lot in return. Besides offsetting your carbon footprint and reducing your energy bill, installing a solar PV system can qualify you for significant tax savings with the federal residential solar energy tax credit.
If you’re interested in taking advantage of the solar tax credit incentive, check out FreshBooks’ guide below.
- The solar tax credit provides dollar-for-dollar amounts that you can subtract from your federal tax liability.
- Depending on the installation year, you can claim a federal tax credit on your expenses at up to a 30% rate.
- You can use state and local incentives in tandem with the solar tax credit, but doing so can affect your total savings.
Table of Contents:
- What Is a Tax Credit?
- What Is the Federal Solar Tax Credit?
- How Does the Federal Solar Tax Credit Work?
- What Expenses Are Covered by the Solar Tax Credit
- Eligibility for Federal Solar Tax Credit
- How To Claim Solar Tax Credit
- How Do Other Incentives Affect the Federal Solar Tax Credit
- Enhance Your Tax Efficiency with FreshBooks
- Frequently Asked Questions
What Is a Tax Credit?
Tax credits refer to a dollar-per-dollar amount that taxpayers can subtract from their federal taxes due. These credits often help promote activities that the federal government identifies as advantageous, such as behaviors regarding the economy, environment, education, or other areas.
Compared to tax deductions, which lower your taxable income, tax credits are generally considered more advantageous. Because a federal tax credit reduces your owed taxes dollar-per-dollar, it offers more savings opportunities than deductions that reduce the tax liability according to your marginal tax rate.
What Is the Federal Solar Tax Credit?
The solar tax credit, which is one credit of many in the Residential Clean Energy Credit program, is a non-refundable federal tax credit meant to incentivize the installation and use of residential solar panels. By spurring the installation of solar panels, the Residential Clean Energy Credit program contributes to the exponential growth and hundreds of thousands of jobs in the U.S. solar industry.
The solar tax credit doesn’t apply to costs associated with structural work or upgrades to install panels on, e.g. a new roof, but it can cover a portion of expenses related to the equipment such as the solar panels and their installation. As long as your solar system services a home located in the United States, you can claim a percentage of the cost for that given tax year.
How Does the Federal Solar Tax Credit Work?
The solar tax credit allows you to claim a percentage of the cost of a solar power system installation to reduce your owed federal income taxes. There’s no cap on the dollar amount you can claim, but you won’t receive a tax refund if your eligible amount exceeds your tax liability.
For example, if you claim $1,500 for the solar tax credit but only have $1,000 in tax liability, your liability will be calculated at $0 rather than a refund of $500. You can, however, carry your unused solar tax credits forward for the following year to reduce your tax bill. For 2023 taxes, the solar panel credit is 30% as per the Inflation Reduction Act and will remain so through 2032.
The actual cost you can claim depends on the credit percentage for the given year you installed and activated your solar system:
|Solar Panel System Installation Year||Credit Amount|
It only takes one or two tax credits or deductions for your tax filing to get complicated. Check out this video to see how FreshBooks can help with tax preparation.
What Expenses Are Covered by the Solar Tax Credit
If you install a solar panel system, you may be able to claim the solar tax credit to help cover the following expenses:
- Solar PV Panels or PV Cells: PV panels or cells used to power an attic fan, but not the fan itself
- Labor Costs: Costs for on-site preparation, assembly, installation as well as permitting fees, inspection costs, and developer fees
- Balance-of-System Equipment: Equipment and components such as wiring, inverts, and mounting equipment
- Energy Storage Devices: For power storage equipment, such as solar batteries, that have a minimum capacity of 3 kilowatt-hours
- Sales Taxes: Sales tax that applies to eligible expenses only
Eligibility for Federal Solar Tax Credit
To qualify for the solar tax credit, you must satisfy all of the following criteria:
- Your solar PV system was installed between January of 2006 and December of 2023
- The solar PV system is located at a residence of yours in the U.S. It can be a house, a houseboat or a mobile home.
- You own the solar PV system and purchased it with cash or financing and aren’t leasing the system or paying a solar company to purchase generated electricity; OR
- You purchased an interest in an off-site community solar project and the produced electricity is credited against your home’s electricity
- The solar PV system is used or being used the first time—the solar tax credit can only be claimed for original installation
You can claim the full credit if your residence is used less than 20% for business purposes. The credit has to be prorated if you use the house for more than that.
How To Claim Solar Tax Credit
After you complete your solar power system installation, you can claim the solar tax credit. This means that if you are building a new home that will include the solar system, you will be able to claim the credit in the year you move into the house. Make sure to get your solar provider the appropriate documentation to go with your taxes.
The steps to claim the solar tax credit include:
- File IRS Form 5695 with your tax return
- Calculate the credit amount in Part I; enter your project costs on line 1, then complete calculations on lines 6a and 6b, calculate tax liability calculations on line 14, and complete calculations on lines 15 and 16
- Apply the credits calculated from tax Form 5695 to line 5 on Schedule 3 (Form 1040)
If you cannot claim all the deductions in the current tax year, you can carry forward the unused to future tax years.
How Do Other Incentives Affect the Federal Solar Tax Credit
Your solar energy system may qualify for other tax credits, utility rebates, and other incentives from your state and local government, which you can use in tandem with the solar tax credit. Doing so can affect your total savings, so you’ll have to do some calculations for your tax return.
State Tax Credits
Certain states, such as Arizona, Hawaii, New Mexico, and Colorado, offer a statewide tax credit that you can use in conjunction with the federal solar tax credit to lower your tax bill. These tax credits work similarly to the federal solar tax credit and don’t usually reduce your federal credits, but exact credit amounts vary between states. Keep in mind that receiving a state tax credit can bump up the taxable income you report on your federal taxes.
The majority of states require net metering. If you operate a home solar power system in one of these states, you can report the excess energy it generates to the utility grid to qualify for bill credits. This bill credit counts as taxable income and increases your gross income, but it doesn’t reduce your federal credit.
To help reduce the barrier to entry and encourage homeowners to install solar panels or other solar energy systems on their properties, some electric utility companies offer upfront rebate incentives. They can take various forms, such as direct cash payment based on factors such as system size or installation requirements or rebates based on the solar energy system’s energy output.
Solar Renewable Energy Credit
Solar Renewable Energy Certificates are similar to but separate from net metering. If you install a solar power system and register it with state authorities, you can earn credits for the amount of electricity your system generates. The payments you receive from this incentive qualify as taxable income.
State Government Rebates
Some states offer upfront rebates for solar power system installations, but this amount doesn’t affect the amount you claim for the federal solar tax credit. For example, if your total solar power system installation costs amounted to $15,000, and your state gave you a rebate of $1,000, your federal solar tax credit would be based on the pre-rebate amount of $15,000.
Enhance Your Tax Efficiency with FreshBooks
Going solar can be great for both your wallet and carbon footprint, especially when combined with the federal solar tax credit and other renewable energy incentives. By using FreshBooks accounting software, you can keep track of and organize your solar power system installation expenses and maximize your savings from the solar tax credit.
If you’re ready to tackle your finances and get the most from tax deductions and credits, FreshBooks is here to help. Try FreshBooks free to get started.
FAQs About Federal Solar Tax Credit
For all your lingering questions, check out these FAQs about the federal solar tax credit and how it can maximize your tax savings.
How many years can you roll over the solar tax credit?
You can roll over unused portions of your solar tax credit as long as the solar tax credit program is still in effect. Unless the government extends the program, the last year to take the credit will be for tax year 2034.
How much of a tax break do you get for solar panels?
Depending on the year you install your solar power system, the U.S. Department of Energy provides tax credits for your total costs at a rate between 22% and 30%.
Can you write off solar panels for your home office?
You can write off solar panels as a business expense for your home office, but it may make claiming the solar tax credit more complicated. If the costs for the solar PV system are mainly for residential rather than business purposes, you can claim the credit in full. If less than 80% of the cost is for residential purposes, only the residential portion can be used to claim the credit.
How many times can you claim the energy tax credit?
You can claim the energy tax credit, which is a separate tax credit incentive from the solar tax credit, every tax year that the program is active as long as you have qualifying expenses.
Will the 30% solar tax credit be retroactive?
The solar tax credit was 30% for 2022 and 2023, so if you forgot to claim the credit on your 2022 taxes, you can amend them and retroactively apply it to solar PV systems installed in 2022.
Can you claim the solar tax credit twice on a second home?
You can only claim the solar tax credit once per system, but you can claim it multiple times for separate original installations or uses. This includes secondary residences and vacation homes.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .