The solar tax credit extension is great news for homeowners looking to use green power. Now, the federal tax credit for the purchase and installation costs of a residential solar system has been extended through 2023. The credit for 2021 and 2022 is 26% of the cost of the solar installation. This credit drops to 22% for 2023. Which is the final year of the credit (unless extended again by Congress).
The solar tax credit is nonrefundable, meaning it can only reduce your tax liability to zero. However, you can carry the portion of credit now allowed in the next tax year. It can then be added to the credit allowable for the following year. The tax code concludes that any credit carryover can be added to the credit in the subsequent year. However, what is unclear is whether any carryover will be allowed in 2024. That is because the credit expires at the end of 2023. In addition to the credit reducing the regular tax, it also reduces the alternative minimum tax, should you be subject to it.
Regardless that the solar tax credit has been extended – before you sign, know your final costs.
Based on TV ads, you may think that Uncle Sam is going to pick up 26% of the entire bill. Sadly, that’s just not true.
The federal government has a 26% tax credit for the cost of a qualified solar installation. (Some states also have solar credits or other tax incentives). However, the federal credit is non-refundable. The credit can be only used against your current tax liability. That is, any excess carries over to future years, as long as the credit still applies in future years. The credit will be allowed through 2023. This means that you may not get all the credit in the first year, as you might have been promised. (Or assumed from the initial advertisement).
Example:
Your solar installation costs $25,000. That would qualify you for a solar tax credit of $6,500. But suppose the income tax on your tax return is only $4,000. Then, the credit would reduce your tax liability to zero. The other $2,500 ($6,500–$4,000) of the credit is carried over to 2022’s tax return. However, the credit will be limited to that year’s tax amount. If your tax is less than the amount of the credit (again), the excess credit carries to the following year. This repeats until the credit is used up, or it expires.
Know the entire cost of the system upfront, to know if the solar tax credit can help you.
Compare the cost of the system to conventional electricity costs. Be sure to include the interest you will be paying if you are financing the installation. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system really worth the cost? Electricity costs can vary significantly according to locale.
Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages; you may simply want to go green or go off the grid where electric service is not reliable.
Ready to take advantage of the solar tax credit extension?
Ready to move forward with a solar installation? Awesome. Here are some of the issues you need to be aware of.
Qualifying Property
Only the following solar power systems are eligible for the credit:
- Qualified solar electric property. This is property that uses solar energy to generate electricity for use in a main or second residence.
- Qualifying solar water heating property. There are a few qualifiers here:
1) the solar water heating must be used in a home located in the U.S., and
2) the system is for a main or second residence where at least half of the energy used to heat water is derived from the sun.
Be aware that heating water for swimming pools or hot tubs does not qualify for the credit. AND the solar equipment must be certified for performance by the Solar Rating Certification Corporation. If not by SRCC, then the solar installation must be certified by a comparable entity endorsed by the state government.
When is the Credit Available?
The credit may be claimed on the return the year that the installation was completed. For example, if you purchase/pay for a system completed in 2022, the credit will be 26% of the cost. But if the project isn’t completed until 2023, the credit will only be 22%. This becomes a bigger issue for systems installed during 2023. This is because bigger solar systems take time to install. However, if the system isn’t installed before 2024, there will be NO credit is available. So, if you plan to purchase a solar system in 2023, do it as early in the year as possible. This ensures the installation will be complete by 2024 in order to receive the tax credit.
Who Gets the Solar Tax Credit?
Surprise! To qualify for the credit, you don’t have to own the residence where the solar property is installed; you need only be a “resident” of the home. The tax code does not specify that an individual has to own the home, only that it is their residence. For example: A son lives with his mother, who owns the home. The son pays to have the solar system installed; the son is the one who qualifies for the credit.
Multiple Installations
The credit is available for multiple installations. For instance, after the initial installation, if you add additional panels to increase capacity. These solar additions are treated as original installations. Thus they would qualify for credit at the credit rate applicable for the year the additional installation was completed. This is provided that the installation is done before 2024. On the other hand, replacing damaged panels or costs to perform maintenance would not qualify for the credit. This is because these items were not a part of the original system; thus their costs would not qualify for the credit.
Do Batteries Qualify for the Solar Tax Credit?
A battery will only qualify for the credit if it is charged solely by solar energy. Storage batteries have become popular in areas where there are frequent power outages. However, this may be more of a convenience than a necessity, so consider the cost carefully. A software-management tool also qualifies for the credit in cases in which the software is necessary for use. For example: when software is required to monitor the charging actions of the solar system. Software qualifies whether it was a part of the original installation, or added later.
Installation Costs
Expenditures that qualify for the credit include:
- amounts paid for labor costs for onsite preparation, assembly, or original installation and/or,
- piping or wiring connecting the property to the residence.
This includes expenditures relating to a solar system installed on a roof or ground-mounted installations.
Basis Adjustment
With respect to a home, the term “basis“ generally refers to the cost of the home plus improvements. The basis is the amount subtracted from the sales price that determines the gain or loss when the home is sold. The cost of a solar system adds to a home’s basis. However, because the solar credit is a tax benefit, the credit reduces the basis. Different rules apply when a state does not provide a solar credit.
Association or Cooperative Costs
Are you a member of a condominium association for a condominium you own? Or are you a tenant-stockholder in a cooperative housing corporation? If so, this is treated as if you have paid your qualifying share of the solar system costs incurred by the association.
Mixed-Use Property
Do you use a portion of your residence for deductible business? Or do you rent part of your home to others? If so, the expenses must be prorated. This is because only your personal portion of the qualified solar costs can be used to compute the credit. However, there is an exception if less than 80% of the property is used for nonbusiness purposes. In this case, the full amount of the expenditure is eligible for the credit.
Newly Constructed Homes
Planning on purchasing a newly constructed home that includes a solar system? You may qualify to claim the solar credit. However, to claim the credit, the solar system costs must be separate from the home construction costs. In addition, you must have the certification documents.
Utility Subsidy
Some public utilities provide a nontaxable subsidy (rebate) for the purchase or installation of energy-conservation property. In that case, the cost that is eligible for the credit must be reduced by the amount of the nontaxable subsidy received.
As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? We’re happy to help you work this out for yourself. Please call our office for a consultation before signing any solar contract. We can help explain the rules about the tax credit to make sure a solar system is appropriate for you.
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