What is the Federal Solar Investment Tax Credit (ITC)?

What is the ITC?

The Investment Tax Credit (ITC) is currently a 26 percent federal tax credit claimed against the tax liability of residential (under Section 25D) and commercial and utility (under Section 48) investors in solar energy property. The Section 25D residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when homeowners purchase solar systems and have them installed on their homes. In the case of the Section 48 credit, the business that installs, develops and/or finances the project claims the credit.

How much is the ITC?

Starting in 2020, it will be equal to 26% of the cost of eligible solar equipment until the end of 2020. It steps down in 2021, the final year of the tax credit. So the sooner you act, the more you can save.

What is a tax credit?

A tax credit is not a tax rebate. A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 26 percent of the basis that is invested in eligible solar property which has begun construction through 2019. While a rebate pays you back, a credit offsets the balance of tax due. So, if you owe little to no federal taxes there is little to nothing to offset, and you won’t be able to take full advantage of the credit.

How do I receive my credit?

To receive your credit, you must complete IRS Form 5695 when you file your taxes and add your renewable energy credit information to your typical form 1040. Popular federal tax filing software include this credit as a default. If you use an accountant or tax processor, tell them that you purchased solar.

On the other hand, if you pay at least as much in taxes as you get for your tax credit, you can pay off your tax debt with the credit and/or get the remainder after withholding as a refund. Even better, if you don’t owe the full amount of your tax credit in the first year, you can roll the credit over to pay tax debt accrued in the following years (for as long as the ITC is in effect).

How do I qualify for the ITC?

To qualify for the full 26% federal solar ITC, you must meet the following requirements:

• Valid through December 31, 2020. Consult your tax advisor for details.
• You must own your home. Renters are not eligible.
• You must own your solar system. 
• You must pay enough taxes to the federal government to qualify for the 26% tax credit. It’s a tax credit, not a rebate.

After 2021, the residential credit will drop to zero.