The investment tax credit (ITC), also known as the federal solar tax credit, was established by the Energy Policy Act of 2005 to support the growth of solar energy in the United States. Originally set to expire at the end of 2007, the initial credit was extended by congress on multiple occasions. The most recent extension occurred in December 2020, extending the ITC to 2023 for residential federal solar tax credit and 2024 for commercial installations.
The credit is a dollar-for-dollar reduction of taxes for a percentage of the cost of the solar photovoltaic (PV) system and can only be claimed on a new or first use system. There is no maximum amount of the credit which can be claimed, but the credit must be claimed in the year the solar PV system is placed into service and reported on Form 5695. If the amount of credit exceeds the tax liability for the year, the excess will be carried forward for five years. The eligible cost of the system includes the solar panels, mounting equipment, wiring, contractor labor onsite, energy storage devices, and sales tax on the eligible expenses. It does not include any prep to the existing structure such as new shingles. The code section included language to allow solar tiles, which affix directly to the roof, to be allowed as qualified equipment but that does not mean underlying shingles increase the credit. A storage device, which stores 100 percent solar energy, placed into service subsequent to the year the residential credit is taken is considered part of the qualified property and a credit may be claimed on its full eligible costs. For businesses, the ITC is available to be claimed if the battery uses more than 75 percent solar energy to generate electricity. The ITC percentage is prorated by the percentage of solar energy used. For example, if the solar input is equal to 75 percent and the solar PV system is placed into service during 2021 (26 percent), the percentage of eligible cost is 19.5 percent.
Solar tax credits may be claimed by both individual and business tax filers. Individual filers who own multiple properties may be eligible for residential solar credits at each location a solar PV system is placed into service. For second homes or vacation properties, residential solar credits are available for property improvements. However, improvements made to rental properties are not eligible for the residential federal solar tax credit but may be eligible for the business ITC.
Solar panels installed for a residence that also has a home office are eligible for the residential federal solar tax credit. If 80 percent or more of the PV system is used for residential energy, the full cost may be claimed in the residential credit. If less than 80 percent of the energy is used for the residence, a prorated portion of the cost may be used towards the individual tax credit. The remaining portion of the qualified expense is eligible for a similar commercial ITC on the business return. Financed PV systems are eligible for the credit if the full cost of the system is contractually required to be paid. Related costs, such as interest, origination fees, and extended warranty expenses are not eligible towards the credit. Tenant stockholders at a cooperative housing corporation and members of condominiums are eligible for the credit in the amount they contribute to the cost of an eligible PV system.
Subsidies provided by a utility to install a solar PV system may be excluded from income. In this case, the subsidy should reduce the system cost to compute the tax credit. Rebates from state governments also effect the federal tax credit. For example, if the solar PV system costs $20,000 and there is a utility rebate of $2,000, the eligible costs would be $18,000.
The Biden Administration has plans to include a 10-year extension of the tax credit in future legislation, but there is no guarantee that Congress will approve it. If a taxpayer or business owner is thinking of installing a solar system, placing a system into service prior to the end of 2022 will ensure they receive a 26 percent credit.
2016-2019: 30 percent of the system cost placed in service,
2020-2022: 26 percent of the system cost placed in service,
2023: 22 percent of the system cost placed in service,
2024: 10 percent of the system cost placed in service, only for new commercial solar systems.
If you have any questions about the information above, please contact your E. Cohen advisor.
Michael Kissell, CPA
Connor Boyle, CPA
Michael Kissell, CPA
Michael Kissell is a Director in E. Cohen’s Tax Services Group. Michael has extensive experience as a state and local tax consultant and tax compliance manager serving clients in government contracting, information technology and other industry groups. His technical and managerial experiences include:
Michael earned a B.S. in Accounting and Information Systems and a Masters of Accounting and Information Systems with a specialty in Financial Services from Virginia Tech. He is a Ce