Solar Tax Credits At a Glance - What Homeowners Need to KnowWhatever their reasons for choosing solar electricity - lower utility bills, a desire for renewable energy, increased energy independence - homeowners who commit to the use of solar power can, in many cases, receive some tax relief at the federal level. While state and local governments may provide a range of incentives for homeowners to achieve greater energy efficiency, federal tax credits for solar energy are separate from these programs and come with their own specific requirements. Since adopting the Energy Policy Act of 2005, the federal government has offered tax credit to residential property owners who install solar-electric systems, along with solar water heating systems and fuel cells. In both 2008 and 2009, changes to this legislation further broadened its application, removing caps on the maximum credit and extending deadlines for installation and use of solar equipment. |
Today, homeowners may claim a tax credit of 30% of the qualified costs for installing a solar electric system that serves his or her residence (not necessarily the primary residence.) Qualified charges may include labor, onsite preparation and assembly of the system, and infrastructure work to connect it to the house. For systems placed “in service” between January 1, 2006 and the first day of 2009, the maximum tax credit is $2,000. However there is no maximum credit for systems placed in service after January 1, 2009. If the solar energy credit should happen to exceed the homeowners’ federal tax liability, the difference may be carried forward to the next tax year until December 31, 2016, when the program expires.
It is likely that homeowners opting for solar electric have done their homework and identified multiple sources for funding, rebates and/or grants to reduce their overall capital investment. These additional incentives will impact how the federal income tax credit for solar energy is applied to them, or in some cases, may disqualify them for the credit. For example, if a homeowner installs solar equipment at a cost of $20,000, and he or she receives a rebate from the local utility company in the amount of $2,000, then his “tax basis” for the purposes of calculating the 30% credit is $18,000. Additionally any government loans that were secured to help pay for the system are probably considered “subsidized energy financing” and will similarly reduce the tax basis on which the credit is calculated, but only if the system was installed before 2009. There is no reduction of the tax basis for any system on which installation was completed after 2008, even if work on the system began earlier. Homebuilders may not receive the tax credit when building the house for sale, however the buyer of the house will receive the tax credit provided that the home is going to function his or her residence. Once the home is sold, the tax credit can’t be recaptured, but the seller will have reduced his tax basis and is more likely to realize a gain on sale.