The United States and much of the world is turning from fossil fuels to alternative forms of energy. According to an August, 2023 article in the New York Times, this shift is found even in areas dominated by the oil and gas industries. To a certain extent, this shift is encouraged in the United States by tax policy. Solar tax credits are an important part of this policy.
Residential Clean Energy Credit
The Residential Clean Energy Credit provides tax credits for expenses to install renewable energy systems in homes, including solar, wind, geothermal, fuel cells or battery storage technology. The purpose of the credit is to encourage the adoption of green energy alternatives over traditional energy sources.
This article focuses on the Federal Solar Tax Credit, which is the portion of the Residential Clean Energy Credit that relates to the installation of solar energy panels and other forms of solar technology. The credit is sometimes known as the Solar Investment Tax Credit or the Solar Panel Tax Credit.
What is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in taxes owed. It lowers your tax bill in the amount of the credit. A tax credit is not a tax deduction, which lowers taxable income. Tax credits are a much more powerful benefit that tax deductions.
How to Calculate Federal Solar Tax Credits
The Solar Tax Credit is a percentage of the cost of a solar energy system.
In August, 2022, the government increased the credit from 26% to 30% for installations between 2022 and 2032.
There is no maximum amount that can be claimed for the credit in any year. And there is no dollar lifetime limit on the tax credit.
Eligibility for Federal Solar Tax Credits
The following are requirements for eligibility for the Solar Tax Credit:
- The solar energy system must be installed between January 1, 2017 and December 31, 2034
- The system must be at your residence in the United States
- The system must be purchased outright or financed
- The system must be new or being used for the first time. Original installation is required.
Payments to lease a solar energy system are not eligible for the tax credit.
Payments to purchase electricity generated by a solar energy system are also not eligible for the tax credit.
As an alternative to purchasing a solar energy system for home, you may purchase an interest in an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption.
You cannot claim a tax credit if you are a renter and your landlord installs a solar system, since you must be an owner of the system to claim the tax credit.
You may claim a tax credit for a solar energy system installed on a vacations home.
You may not claim the credit if you are a landlord or other property owner who does not live in the home.
Used (previously owned) solar energy systems are not eligible.
Allowable Expenses to Calculate Solar Panel Tax Credits
Here is a list of expenses that may be used to calculate the tax credit:
- Solar panels or solar cells (including those used to power an attic fan, but not the fan itself)
- Contractor 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
- Energy storage devices or batteries that have a capacity rating of 3 kilowatt-hours (kWh) or greater
- Sales taxes on eligible expenses
Subsidies, Rebates and Incentives
Subsidies paid by utility companies to install a solar energy system are subtracted from the cost of the system when calculating the tax credit. This is true whether the subsidy comes directly to you or to a contractor on your behalf.
Rebates must also be subtracted from the cost of the system. Rebates are define as follows:
- The rebate is based on the cost of the property
- It comes from someone connected to the sale such as the manufacturer, distributor, seller or installer
- It is not given as payment for services you provide
However, payments from a public utility to compensate for excess generated electricity not consumed by the taxpayer but delivered to the utility’s electrical grid (for example, net metering credits) are not considered to be subsidies. They do not effect the taxpayer’s credit qualification or amounts.
State Incentives and Tax Credits
In contrast to utility subsidies, state tax credits and clean energy incentives from state governments generally are not subtracted from qualified costs. They do not reduce the federal tax credit.
Homes Used for Multiple Purposes, Including Home Offices
When the amount spent on the solar energy system is predominantly used for residential rather than business purposes, the residential credit may be claimed in full.
However, if less than 80% of the solar system cost is a residential expense, only the percentage that is residential spending can be used to calculate the federal solar tax credit for the individual’s tax return. The portion that is a business expense could be eligible for a similar credit on the business’s tax return.
Finance Costs
Miscellaneous expenses, including interest owed on financing, origination fees and extended warranty expenses are not eligible expenses when calculating your tax credit.
Roof Replacements and the Solar Tax Credit
Roof materials and structural components that serve only a roofing or structural function do not qualify for the credit. For example, roof trusses and traditional shingles that support solar panels do not qualify.
However, some solar roofing tiles and solar roofing shingles serve both the functions of solar electric generation and structural support and such items may qualify for the credit.
Nonrefundable Credit
The solar energy credit is a nonrefundable tax credit. This means that the credit will not generate a tax refund if the amount of the credit is greater than your total tax liability.
However, you can carry over any unused amount of tax credit and apply it to reduce the tax you owe in future years.
Solar Tax Credit Form 5695
The solar energy tax credit is claimed on IRS Form 5695 and is attached to your tax return.
Form 5695 is used for all residential energy tax credits.
State Tax Incentives and Other Solar Panel Tax Credits
The following is a summary of solar incentives in three selected states.
Georgia Solar Tax Credits and Other Incentives
- Georgia does not have its own solar tax credit.
- Net metering for excess energy produced is not guaranteed in Georgia. Check with your utility provider for rates and availability.
- Jackson EMC Right Choice Sun Power Solar Rebate Program: This is a cash-back incentive for up to $250 per kW installed, up to a maximum of $2,500.
- Central Georgia EMC Residential Energy Efficiency Home Plus Loan Program: This is a solar financing option for customers of Central Georgia EMC. It can provide low interest rates and down payment requirements for solar projects and other energy efficiency upgrades to help make converting to solar more accessible.
- Georgia Solar Program: This is a solar rebate offered by the U.S. Department of Energy. It is only available to commercial customers.
- Georgia does not offer a property tax exemption for solar equipment.
- Georgia does not provide a sales tax exemption for solar equipment.
Kentucky Solar Tax Credits and Other Incentives
- Kentucky does not have its own solar tax credit.
- Net metering for excess energy produced is mandated by the state of Kentucky for all investor-owned utilities (IOUs) and electric cooperatives, except for the Tennessee Valley Authority (TVA). Provided you are not a customer of this utility provider, the energy credits you earn will be for the full retail rate, which is the best-case scenario.
- Blue Grass Energy Cash-Back Incentive: Blue Grass Energy customers can get up to $750 in cash-back incentives for installing energy-efficient equipment like heat pumps, air sealing and insulation.
- Cumberland Valley Electric Rebates: Customers of Cumberland Valley Electric have access to rebates ranging from $50 to over $1,300 for a variety of energy-efficiency home upgrades, like heat pumps, energy-efficient appliances and more.
- Duke Energy Rebates: Duke Energy provides rebates of up to $450 for solar water heating equipment, energy-efficient HVAC equipment and more.
- Jackson Energy Cooperative Rebate Programs: Jackson Energy Co-op provides rebates for weatherization upgrades.
- Louisville Gas & Electric Company (LG&E) and Kentucky Utilities (KU) Rebates: Customers of LG&E and KU can take cash-back incentives up to $750 for new heating and cooling equipment and energy-efficient appliances.
- Taylor County RECC Cash-Back Incentives: Customers of Taylor County RECC can get access to rebates for installing things like heat pumps and energy-efficient windows, doors and insulation in new construction.
- Kentucky Property-Assessed Clean Energy (PACE) Financing – This solar financing option keeps initial and ongoing solar costs to a minimum. It is currently only available to small businesses and larger commercial customers.
- Kentucky Incentives for Energy Independence – Credits are available for income taxes for commercial customers who do not use fossil fuels as an energy source.
- Kentucky does not offer a property tax exemption for solar equipment.
- Kentucky does not provide a sales tax exemption for solar equipment.
Alabama Solar Tax Credits and Other Incentives
- Alabama does not have its own solar tax credit.
- Net metering for excess energy produced is not guaranteed in Alabama. Check with your utility provider for rates and availability.
- Alabama Power Energy Efficiency Rebates: Customers of this power company can get up to $200 in rebates for installing Smart Thermostats and up to $650 for installing hybrid or heat pump water heaters.
- Central Alabama Electric Cooperative Residential Energy Efficiency Loan Program: This program provides low-interest loans for improving energy efficiency in your home. Financing is available up to $10,000 for weatherization and $20,000 if that includes installing a heat pump system.
- Dixie Electric Cooperative Residential Energy Efficiency Rebate Program: This power company offers free energy audits and cash-back incentives for installing heat pumps.
- Dixie Electric Cooperative Residential Energy Efficiency Loan Program: This is a financing program offered in partnership with Regions Bank that provides affordable, low-interest loans for improving home energy efficiency.
- South Alabama Electric Cooperative Residential Energy Efficiency Loan Program: Customers of this provider can get access to affordable financing for heat pumps, insulation, doors and windows.
- Central Alabama Electric Cooperative Residential Energy Efficiency Rebate Program: This power provider offers rebates between $235 and $700 for water heater and heat pump installation.
- Wiregrass Electric Cooperative H2O Plus Program: This company offers cash-back perks for installing a wide range of heat pumps, including geothermal equipment. The incentives fall between $300 and $400 per ton installed.
- Alabama offers a statewide exemption for solar equipment when it comes to property taxes.
- Alabama does not provide a sales tax exemption for solar panels
For additional information about solar energy systems and services, we suggest that you contact Olivia Amyette at Infinite Energy Advisors in Atlanta. She can be reached by telephone at (678) 933-8324 or by email at Info@InfiniteEnergyAdvisors.com.
For questions about residential energy credits, Form 5695 or any other tax, accounting or IRS matter, feel free to call Massey and Company CPA at 678-235-5460 or 773-828-0551. You are also welcome to contact us by email at gary.massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audit defense, sales taxes and small business accounting and bookkeeping.
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