In Dec 2020, the US Congress passed a spending bill that included a solar tax credit extension. Thanks to this $1.4 trillion federal spending package, homeowners and other property owners who install solar panels in commercial, residential, utility-scale, and industrial market segments will qualify to receive a 26% solar tax credit. This is an incentive for property owners who plan to undertake solar paneling projects at a low cost.
Investment experts note the solar power investment tax credit as an effective federal policy implementation that supports the expansion of the solar panel industry and clean energy. So, what’s the federal solar tax credit, and how does it work?
What’s a solar tax credit?
A solar investment tax credit is an incentive policy that allows owners of new commercial and residential solar panel systems to deduct 26% of the system’s cost from taxes. The credit acts as a deduction in the amount of tax you owe.
According to the Solar Energy Industries Association, this incentive program has contributed to approximately 10,000% growth in the solar energy industry, with an average yearly growth of 50 percent in the last ten years. Besides, the program has helped create thousands of jobs. For instance, it contributed to the creation of over 156,000 jobs from 2014 to 2019. Also, the opportunity led to the opening of thousands of solar companies and triggered exponential growth in the solar industry.
The primary goal of the federal solar tax credit is to incentivize solar energy and create employment opportunities. After the 2005 Energy Policy Act, the tax credit for solar energy investments was 30 percent of the entire system’s cost. This legislation was set to expire by the end of 2006, but its popularity led to the Tax Relief & Health Care Act of 2006, a one-year extension.
The 2008 Emergency Economic Stabilization Act extended the solar investment incentive for 8 year, eliminated a $2,000 limit for residential solar installations, and allowed utilities and companies to spend or pay the minimum to qualify for the solar tax credit. The American Recovery & Reinvestment Act of 2009 eliminated the monetary limit for solar heating & cooling systems. This legislation approved a 30 percent tax credit that lasted till the end of 2016.
Solar tax credit extension: Here’s what you should know
Solar Tax Credit
Following the extension of the solar tax credit program, projected savings on power-related bills through 2024 include;
2021 – 2022: Solar system installations starting or ending before 2023 on commercial and residential properties will be eligible for a federal tax credit worth 26 percent of the system’s cost.
2023: Solar panel installations starting before 2024 on commercial and residential properties will be eligible for 22 percent tax credit of the entire solar system’s installation expenses/
2024: Solar paneling installations starting in 2024 on any commercial property will be eligible for a 10 percent tax credit. But there will be no federal tax credit for solar energy systems installed in residential areas.
The federal solar tax credit extension (2021) assures property owners that solar energy is an excellent investment for people who want to switch to clean energy. The continuation of solar energy investment incentive programs guaranteed investment opportunities and stability in the solar energy industry.
How long can you claim the solar investment tax credit?
Once you file your tax for the particular year you purchased solar panels and got them installed, you will get tax credit the following year. In case you do not get the entire tax credit amount in the first year, it is possible to carry over the undedicated amount for a maximum of five years. It is important to seek tax guidance from a professional to find out if you are eligible for tax credit. Be sure to file under IRS Form 5695.
The IRS usually applies solar tax credit to the amount of tax you owe. For instance, if you quality for $5000 (tax credit) but you owe taxes worth $4000, you can choose to allocate that amount as a tax credit. The remaining amount can be issued a refund. And if you already paid your federal tax by withholding that amount from your income, the solar tax credit will still be issued a refund.
Are there income-related limits for solar investment credit?
Though there is no income cap for this solar investment tax credit extension, you are not eligible for solar credit if you don’t pay federal tax. For those who worked part of the year, retired, or on a fixed income, you may not pay sufficient taxes to qualify for solar investment tax credit. Here are other important requirements to qualify for this incentive program;
- You own a property or business. A renter can’t receive solar tax credit even when they installed a solar energy system.
- You have a federal tax liability that qualifies for this credit.
- You own a functional solar energy system. Property owners who simply lease solar panels will lose eligibility to the leasing organization.
- The solar system should be unused or new.
- The Solar System must be installed in a property in the United States.
When is the best time to switch to solar energy?
With these solar energy incentive programs in mind, why wait to purchase and install solar panels in your home or commercial property? The sooner you begin construction, but the sooner you will start to enjoy the federal tax credit.