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As an expert solar advisor, one question I get all the time is, “Will I qualify for the federal tax credit?” So I decided to share this post to help you understand how the federal solar tax credit works as well as who qualifies and who does not qualify for the federal tax credit.

What is the Solar Federal Tax Credit?

The Federal Solar Tax Credit, also known as the Investment Tax Credit (ITC), is a government-sponsored program that provides incentives for homeowners and businesses to install solar systems. The ITC was established in 2006 and has been extended multiple times, making it one of the most important financial benefits for those who decide to go solar.

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Does the solar tax credit work for solar leases or PPA’s?

If you choose to go with a Solar lease agreement or a PPA, (power purchase agreement), the tax credit will not apply to you, because you are not buying the system. In this case the leasing company actually gets the federal tax credit, because they are the owners of the system. That is how it works. It’s a pretty sweet deal for them! This is one of the reasons a lease or PPA often have lower monthly payments. The trade off, of course, is that in 20 years or whatever the time-frame stated in terms of the lease agreement ends, you do not own your system and you will have to sign another lease agreement or go back to renting electricity from the utility company. If you own your system, you get the tax credit and when you pay off your system, you own it outright along with all the power it produces. So the long term benefits of owning as opposed to leasing can be tremendous. For more information see the question in this section on whether to own or lease your solar system.

How does the Solar Federal Tax Credit work?

The Federal Solar Tax Credit works by reducing the amount of federal taxes owed by the taxpayer. If a homeowner or business installs a solar system, they can claim a credit equal to 30% of the cost of the system on their federal tax return. For example, if a homeowner installs a solar system that costs $20,000, they can claim a credit of $5,200 on their federal tax return. This reduces their federal tax liability by $5,200, which means they will owe $5,200 less in federal taxes. Using this example, if at the end of the year, you owe nothing to the government on your federal taxes, you will get a refund check in the amount of $5,200.

 

When does the Federal Solar Tax Credit end?

The Federal Solar Tax Credit has been extended multiple times and is set to gradually decrease over the next few years. Currently, the credit is set at 26% for solar systems installed before December 31, 2022, and will decrease to 22% for systems installed between January 1, 2023 and December 31, 2023. After 2023, the credit will decrease to 10% for commercial systems and will no longer be available for residential systems.

Are Federal Solar Tax Credits Transferable?

Yes, Federal Solar Tax Credits can be transferred. This means that if a homeowner or business does not have enough tax liability to claim the full credit, they can transfer the unused portion of the credit to another taxpayer. For example, if a homeowner installs a solar system and only has $2,000 in federal tax liability, they can transfer the remaining $3,200 of the credit to another taxpayer. This makes it possible for homeowners and businesses to take advantage of the Federal Solar Tax Credit even if they do not have enough tax liability to claim the full amount.

Some states also offer tax credits and tax exemptions for transitioning to renewable energy sources like solar. Checkout The Definitive Guide to Residential Solar in the U.S.  to discover state specific tax credits, rebates, SRECs, tax exemptions and other state specific solar incentives that you can take advantage of in addition to the federal tax credit. If I mention any acronyms or terms that you do not understand, there is an extensive glossary section at the end of the book.

Introducing: The definitive Guide to Residential Solar in the U.S. <==Click here to check it out on Amazon.com

A residential solar system is a great way to reduce your energy costs while doing something positive for your community and the planet. However, when a home solar system is not designed and sold with integrity, it can have a tremendous negative financial impact on the homeowner.

Throughout The Definitive Guide to Residential Solar in the U.S., you will discover the many ways that homeowners have been taken advantage of by smooth-talking solar sales reps. Only to find out, often many months or years after they signed an ironclad contract, that their home solar system is not producing anywhere close to the amount of energy that they were told it would. Many of these homeowners found themselves having to pay a monthly solar bill on top of an electric bill, that they were told would vanish after installing solar panels. This is the unfortunate reality for thousands of solar pioneers and it is the #1 reason that residential solar deserves the bad reputation it has in many markets across the U.S.