A Guide to Solar Panel Tax Breaks
It’s no secret that leaders in energy production are working hard to ensure the viability of renewable energy sources. A large factor in determining renewable energy viability is the economics of it. Only when renewable energy becomes economically viable will it be able to supply larger quantities of clean energy on a greater scale.
Though many residences, businesses and public buildings have adopted solar energy, it still only accounts for less than 1% of energy consumption in the United States and just above 1% globally. European countries like Germany, Italy and Greece have approximately 7% of their energy supplied by solar. But the solar industry has its sights set on far greater adoption rates that are required to grow the industry and help achieve energy independence.
The current paradox facing the solar energy industry is that higher solar installation rates depend on affordability, and affordability depends on higher solar installation rates. So how do solar energy providers and advocates increase solar installation and usage rates if consumers still perceive the initial costs as being too high? The answer is in financial incentives.
Financial incentives ease the burden of high installation costs and encourage homeowners and business owners to purchase solar energy systems. Financial incentives in the form of rebates, tax credits and tax exemptions are available at the municipal, state and federal levels. This strategy intends to galvanize widespread adoption of solar energy throughout the United States.
Today, there are countless financial opportunities for individuals and businesses to take advantage of when it comes to solar. Still, many people aren’t even aware of what’s available or how it all works. This guide will cover some of the most important solar panel tax breaks to be aware of and how to apply for them so you can start earning a return on your investment quicker.
What Is a Tax Credit?
The first step in taking advantage of solar panel tax credits is understanding exactly what that is. A tax credit is a government-authorized amount of money that a taxpayer (individual or business) is allowed to deduct form their taxes owed to the government. Tax credits can be provided at a municipal, state or federal level. Unlike tax exemptions or deductions, which lower a person’s total taxable income, tax credits lower the amount of taxes you owe at the end of the year.
When it comes to solar tax credits, these dollar amounts are deducted from taxes based on a percentage of the total purchase and installation costs of solar products. These costs can be claimed through their designated tax codes when you file your taxes.
Why Are Tax Credits Offered?
There are many reasons why governments establish tax credits. In the case of solar energy, governments issue tax credits because it:
- Lowers the consumer cost of a solar energy system
- Motivates homeowners and businesses to switch to renewable energy
- Reduces energy consumption levels
- Bolsters economic growth in the renewable energy sector
- Alleviates usage constraints on traditional grid energy
- Increases viability of solar energy
- Encourages independence from reliance on fossil fuels
All of this contributes to a larger vision of one day making solar energy economically viable enough to support larger-scale energy provision. Tax credits help people and businesses get on board with switching to solar energy while helping to eliminate financial risks, which are often barriers to adopting new technologies.
Other Types of Solar Tax Breaks and Financial Incentives
As mentioned, tax credits are available to help reduce the level of taxes owed to the government, based on the purchase of solar panels and other related products. But this is just one type of financial incentive offered at varying local, state and national levels.
In addition to tax credits, financial incentives for solar energy installation can include rebates, grants and property or sales tax exemptions. Here’s how these other types of financial incentives work:
Rebate: A rebate, in general terms, is an amount of money the consumer gets back based on certain conditions of their purchase. This allows the consumer to get money back quicker than with a tax credit. Different structures of rebates are available, from lump sum amounts after purchase to regular dollar amounts based on the amount of solar energy being produced. Rebates often come with a time limit, so it’s important to look for this when you first start planning your investment.
Grant: A grant is a sum of money that’s given to individuals or organizations to help them cover the costs of solar panel installations. Grants can come from the government or from private organizations who want to help encourage solar adoption. Grants are often available for low-income homes or for businesses as part of their building energy efficiency improvements. Grants can either fully or partially cover a solar energy project and are typically non-taxable.
Tax Exemptions: A tax exemption occurs when the purchase of a product or service is excluded from an otherwise applicable tax. This can include state or city sales and use taxes or property taxes. Most states offer an exemption on sales taxes when purchasing solar equipment. Depending on the state, this may include solar components as well as the professional installation services.
Another type of tax exemption is for property taxes. Because solar power systems increase home and building values, some states are now excluding solar energy systems from property tax assessments so home and building owners don’t have to pay increased property taxes.
The Federal Solar Tax Credit (Solar ITC)
The most well-known financial incentive for solar energy installation in the United States is a federal tax credit for solar panels, also known as the Solar Investment Tax Credit (ITC). It was first implemented in 2006 as a way to stimulate the solar energy industry in the United States. The solar ITC is available both for residential and commercial installations. Here is what’s included in the federal solar tax credit and how it works:
- Tax Credit Amount: The Solar ITC offers a 30% credit on residential and commercial solar installations. Prior to 2009, there was a $2,000 ceiling on the federal solar tax credit. But as of January 1, 2009, new solar installations don’t have a maximum credit amount. The 30% tax credit for solar panels is available for installations that go into service before December 31, 2019.
- Tax Credit Administration Details: The IRS issues the federal solar tax credit. For residential solar installations it falls under section 25D, and for commercial installations it falls under section 48 of the federal tax code. If your solar tax credit exceeds that year’s tax liability, the remainder can be carried forward to the following taxable year.
- Tax Credit Application: If you’re a residential homeowner, your federal tax credit gets applied to your personal income taxes to reduce your total amount owed. If a business installs a solar energy system, the business claims the credit on their business taxes. The credit amount is calculated at 30% of the total eligible solar installation costs. It’s important to note that the ITC is a credit and that you do not receive a cash rebate from the government later on.
- Tax Credit Eligible Projects: The solar ITC covers solar-electric (photovoltaic or PV) and solar water heating projects. These can include residential or commercial projects as well as installations on RVs, mobile homes and boats deemed to be secondary residential dwellings. The solar project does not have to be installed at the person’s primary residence in order to be eligible for the tax credit, but the residence does have to be in the United States.
- Tax Credit Eligible Expenses: All solar installation packages for home or business are eligible for the solar tax credit. These include the photovoltaic panels, inverters and other components, as well as the installation cost. Backup battery systems for dwellings or buildings that may not be grid-tied are also eligible for the ITC. Any products that upgrade or expand existing solar electric or solar water heating systems are also eligible if they include at least one photovoltaic panel.
- Tax Credit Requirements: Specifically concerning solar water heating projects, the installed equipment must be certified for its performance by the Solar Rating Certification Corporation (SRCC). At least half of the property’s energy used to heat the water must come from solar.
- Tax Credit Term: Originally, the Solar ITC was only offered until the end of 2015. However, it has since been renegotiated and is now offered at 30% now through until the end of 2019. After that, the credit is reduced to 26% in 2020 and 22% in 2021. After 2021, the residential solar tax credit will no longer be available. However, a 10% tax credit will permanently be available to commercial businesses.
State-Level Solar Tax Credits
The Solar Investment Tax Credit issued by the federal government isn’t the only solar tax break available to residences and businesses. Individual states offer their own tax credit for solar panel programs to their residents on qualified solar installation projects.
Here’s how some of the states are offering their own solar tax credits:
1. Arizona: The Arizona Solar Energy Credit is a personal tax credit first offered in 1995. It provides taxpayers with a 25% personal income tax credit based on the total amount spent on residential solar photovoltaic and water heating systems. It offers this 25% tax credit up to the amount of $1,000 per residence.
2. Massachusetts: The Massachusetts Department of Energy Resources provides its residents with a 15% personal income tax credit — up to $1,000 maximum — on all residential solar photovoltaic and water heating installation projects.
3. New York: The Residential Solar Tax Credit program offers New York residents a 25% income tax credit on residential solar energy systems, up to a total amount of $5,000. There is no expiration date on this solar tax credit at this time.
4. South Carolina: South Carolina’s Solar Energy Tax Credit program offers a 25% personal income tax credit on residential and commercial solar photovoltaic and water heating installations. The tax credit limit is $3,500 for any given tax year or up to 50% of taxpayer liability for that year — whichever is less. South Carolina’s Solar Energy Tax Credit program is available now through the end of 2018.
5. Utah: Utah offers a Renewable Energy Systems Personal Tax Credit of 25% on all eligible residential solar energy installations up to $2,000. At this time, Utah has not provided an expiration date on this financial incentive program.
Solar Panel Rebate Programs
Solar panel rebate programs incentivize homeowners and businesses by providing them with a cash rebate after they’ve installed and begun using their solar energy system. These rebate programs and amounts vary by state, municipality and even utility company.
Many solar panel rebate programs are based on production capacity, whereby they offer a certain rebate amount per watt of energy produced. Others may be based on the amount invested in the system’s installation.
Here’s a look at some different solar rebate programs happening at different levels of government and with different project types. Make sure to check the sources for updates as these incentives change frequently:
1. LADWP Solar Incentive Program: The Los Angeles Department of Water and Power’s (LADWP) Solar Incentive Program offers residential homeowners, businesses and government organizations a rebate on solar energy produced by photovoltaic panels. These rebates are available now through the end of 2017. Residential rebates are $0.25 per watt, commercial rebates are $0.40 per watt and governmental or non-profit rebates are $1.15 per watt.
These particular solar panel rebate amounts will step down over time. Rebates are eligible for system sizes between 1 kilowatt and 5 megawatts.
2. CPS Energy Solar PV Rebate Program, San Antonio, TX: The utility company CPS Energy offers San Antonio, TX residents a solar photovoltaic energy production rebate of $0.80 to $1.20 per watt depending on different eligibility tiers. The Solar PV rebate program, funded through the Save for Tomorrow Energy Plan, is available for commercial, industrial and residential installation projects from now through 2020.
3. Boulder, Colorado Solar Rebate: The city of Boulder, Colorado offers its residents and businesses an approximately 15% rebate on any city sales and use taxes paid on materials and/or permits needed to install a solar energy or water heating system. To obtain their rebate, homeowners and businesses must complete their rebate application within 12 months of the city’s final inspection. While this financial incentive program is based on an amount of taxes paid, it is considered a rebate because it gives the applicant cash back, as opposed to a credit.
Solar Tax Breaks and Exemptions
As mentioned, other important solar tax breaks to be aware of are property and sales tax exemptions. Unlike tax credits, solar tax breaks and exemptions are immediately effective. How solar tax breaks and exemptions work depends on the state or local jurisdiction.
Here are some examples of available solar panel tax breaks and exemptions in certain states:
1. California Property Tax Exclusion: California has primarily led the way in solar incentives and adoption in the United States. California alone has over 200 renewable energy incentive programs, including the important Property Tax Exclusion for Solar Energy Systems. This property tax exemption program is statewide and provides a 100% exclusion on the solar energy system’s value.
California’s state tax code doesn’t consider solar energy systems as increasing home value for property tax calculating purposes. Therefore, if you install a residential solar energy system, your property taxes won’t increase because of the value solar adds to the home. This is particularly important in the State of California, where property values have risen dramatically in recent years. A property tax exemption is a nice incentive for those concerned about increasing property taxes.
2. Washington DC Personal Property Tax Credit: Similar to California’s program, Washington, DC offers a 100% exemption on residential and commercial solar installations when it comes to assessing property taxes. This incentive program was implemented in 2012 and covers both photovoltaic and water heating solar installations, as well as other solar technologies.
3. State-Level Sales Tax Exemptions: Often overlooked, solar panel tax breaks are the various sales tax exemptions on solar installations and products. Over 29 states offer some form of sales and use tax exemption on solar equipment, devices or professional installation services performed by contractors. For example, Minnesota, New Jersey, New York and Arizona offer a 100% sales tax exemption on solar energy systems installed for residential or commercial uses, with no maximum amount.
Tips on Claiming and Receiving Tax Credits and Rebates
If you’re planning to install a solar power system for your home or business, it may seem like an overwhelming process, given how many different financial incentives and options are out there. To help make the process easier, here are a few tips to follow while claiming and receiving your solar panel tax credits and rebates:
1. Ask your Solar Design Tech: Our solar design techs are experts in their field. We have robust information about the different types of incentive programs in your area. We can help recommend the best rebates and tax credits for solar panel programs and ensure your particular system meets the eligibility requirements of the incentives.
2. Research Financial Incentives in Your Area: If you’re taking the DIY approach or you just want to do your own research, you can check online using tools like the Database of State Incentives for Renewables & Efficiency (DSIRE). This comprehensive database is funded by the U.S. Department of Energy and holds thousands of different local, state and federal tax credits, rebates, grants and other financial incentives for renewable energy installations.
3. Consult a Tax Professional: Because many of these financial incentives — particularly the federal solar investment tax credit — involve tax liability, it’s important to consult a tax professional. Consulting a tax professional prior to installing your solar electric or water heating system can ensure your specific project meets all eligibility requirements. Additionally, a tax professional can help ensure you’ve completed your applicable tax sections appropriately. This is especially necessary where a business investment in solar is concerned.
4. Act Sooner Rather Than Later: Many of the financial incentives, including the federal solar tax credit, have deadlines attached to them. This is to encourage homeowners and businesses to adopt solar power now. Time-sensitive financial incentives further encourage people to switch to solar if they know their tax credit eligibility will expire. With the federal tax credit, the highest amount available is a 30% credit, which is only available until the end of 2019. From there, the credit amount drops annually until it goes away completely in 2022.
Remember that you’re able to combine multiple incentives together in order to get the greatest possible return on your investment. By combining financial incentives, you not only offset your upfront installation costs with sales tax exemptions, but you can also reach your payback period earlier through the various rebates and income tax credits available.
Impact of Solar Tax Credits and Rebates
Incentivizing solar energy at a consumer level is essential to ensuring the industry’s long-term prosperity. The more homeowners and businesses take advantage of available solar panel rebates and tax credits, the more it supports the industry. As the industry grows, solar energy will become increasingly more accessible to people of all income levels.
The federal solar tax credit in particular has had a tremendous impact on the solar energy industry. Policymakers saw the industry growth and positive changes that came from the original ITC, which caused them to extend the program from 2016 onward. It’s expected that this extension will further drive growth in the solar industry.
It’s believed that by 2020, the solar industry will employ 420,000 workers and will create more than 20 gigawatts of solar electricity annually. It’s estimated that with these projected numbers, solar electricity will account for 3.5% of all energy consumption in the United States by this time. This is a massive increase from the less than 1% solar provides today.
If you are interested in installing a residential or commercial solar energy system, be sure to research all applicable local, state and federal financial incentives you may be eligible for. For more information on which incentives are available to you, visit Wholesale Solar’s list of local and state incentives.