The federal solar tax credit (also known as an investment tax credit or ITC) is a federal government tax incentive designed to encourage property owners to install solar energy systems in their homes. The incentive allows you to deduct 30% of the cost of setting up your solar energy system from your federal tax bill. The tax is open to both domestic homeowners and commercial property owners. Many property owners often wonder how to calculate this tax incentive. Here is how it works.
Who is Eligible?
All American taxpayers, whether businesses or individual are eligible as long as they have purchased a solar energy system or a solar system with an energy storage component. Individuals and companies who lease these systems are not eligible for the ITC because they do not own these systems. This benefit goes directly to the companies that lease out these solar energy systems. However, many such companies still factor these credits in the overall costing of the lease agreement so that the end user still benefits, albeit at a lesser magnitude than he or she had bought the panels.
How is ITC Calculated?
ITC calculations differ depending on a variety of factors. For homeowners, ITC is calculated on the net cost of installation after state rebates and other incentives have been factored in. If you example the total cost of your home solar energy system is $20,000, and you got a rebate of $3,000 from your state, you can only calculate ITC on the $17,000 that remains after you deduct the state rebates. For commercial property owners, the process is a bit different. Here, the ITC is calculated before any other rebates are deducted. For example, if the $20,000 had been a commercial solar energy system, ITC would have been calculated on the whole amount ($20,000). While the ITC rate appears higher, the IRS considers the savings from deducting ITC on gross costs as ‘earned income’ which is subject to taxation. For this reason, the two deductions end up being roughly the same.
IS ITC Refundable?
If you don’t owe the government any taxes, you would assume that the government would pay you the 30% instead of offsetting in on your taxes. Unfortunately, ITC is not a refundable tax. You can, however, claim it in subsequent years (up to five years after installation of the solar system) if you do end up paying tax to the federal government in subsequent years.
Timelines to Note
The ITC is set to decrease from 30% and drop steadily to 10% in three years. This process is set to begin at the end of 2019. To calculate this tax, the federal government requires that construction of the system be underway and at least 5% of the project and costs to have been built/incurred before one can claim this tax incentive. Initially, property owners could only claim tax credits if the system was completed and fully functional. In recent changes, tax credits can be claimed before the project is finished on condition that the solar system is fully operational by the end of 2023. Having an effective solar energy system starts with engaging the right contractor to install it. For years, may property owners have trusted GenRenew for all their solar installations. Contact us today for a quote and take advantage of this fantastic incentive from the government.