Everything you need to know about the solar tax credit
Updated September 2022
Homeowners and business owners who install solar energy are eligible for the Federal Solar Energy Tax Credit, which can mean significant savings and financial benefits when transitioning to clean solar energy. ! The federal solar energy tax credit, also known as investment tax credit (ITC), allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes. The 30% tax credit will be available until the end of 2032. The main takeaways are:
- The federal tax credit allows homeowners and businesses to deduct 30% of their solar system costs from their taxes, with no cap.
- The tax credit can be used for battery storage and EV chargers, with certain caps. It will apply to heat pumps and thermodynamic water heaters from 2023.
- The 30% tax credit will last 10 years until the end of 2032, when it will drop to 26%.
- The credit is renewable, so you don’t need to pay enough tax to use it all up in one year.
We cover federal tax credits in more detail below, for residential, business, and non-taxpaying entities. Our solar experts at ReVision Energy are happy to discuss these details with you as you embark on your solar journey!
Disclaimer: ReVision Energy provides this for educational purposes only, we are not tax professionals and do not offer tax advice. We recommend that all solar customers consult a tax advisor.
Federal Residential Solar Tax Credit
The Federal Solar Tax Credit allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes. This credit will be available until the end of 2032, when it will drop to 26%. The credit can also be carried forward to future tax years if you cannot claim the full credit in the year the system was installed.
With the Inflation Reduction Bill Passed in August 2022, the Solar Tax Credit (renamed Clean Renewable Energy Tax Credit) was extended by 30% over 10 years. This means customers installing solar in 2022 will now receive the full 30% when they file their 2022 taxes!
Residential credit for household energy products
The 30% solar tax credit covers the installation of complementary solar technologies, including battery storage and electric vehicle charging infrastructure, up to certain amounts.
From 2023, home energy improvements, such as heat pumps and water heaters, are also eligible for a tax credit, thanks to the new credit for improving the energy efficiency of homes. You can deduct 30% of the cost of purchasing and installing heat pumps and heat pump water heaters, up to $2,000. The Home Energy Efficiency Improvement Credit also covers insulation and circuit breaker boxes to accommodate the additional electrical load, up to $1,200.
From 2023there will also be a tax credit available for self-contained battery storage with no cap, opening up options for using storage more flexibly.
Business energy investment tax credit (CII)
Businesses and non-taxable entities such as non-profits and municipalities can qualify for a 30% tax credit on renewable energy systems, called the energy investment tax credit. As with the residential tax credit, it was extended with the passage of the Inflation Reduction Bill and will increase to 26% by the end of 2032.
Starting in 2023, companies can use potential stackable “bonus” ITC adders that can increase the total ITC value by 40%, 50% or more. “Bonus” credits can apply to projects that meet national manufacturing requirements, projects on defined “energy communities” or in low-income areas, and projects that are part of HUD-approved affordable housing programs .
Non-taxable entities such as municipalities and non-profit organizations can now access ITC through a new “direct payment” provision by receiving a 100% government reimbursement for the value of ITC in 2023 and at from 2024 if they meet certain conditions.
Federal Tax Credit FAQs:
How does the solar tax credit work?
When you use the 30% credit on your solar project, the ITC amount is applied to your tax payable or money you owe to the IRS. As long as you own your solar installation, you are eligible for the solar investment tax credit. However, if you sign a lease or power purchase agreement (PPA) with a solar installer, you do not own the installation and therefore cannot claim the tax credit. It is important to note that there is no income limit on the federal solar energy tax credit program, so taxpayers of all income brackets may be eligible.
You claim the solar energy investment tax credit when you file your annual federal income tax return.
What does the tax credit cover?
For owners using the 30% ITC, you can cover the following:
- The price of your solar panels
- Labor costs for installation, including permit fees, inspection costs, and developer fees
- Any additional solar equipment, such as inverters, wiring, and mounting hardware
- Solar batteries charged by your system (stand-alone battery storage will be covered from 2023)
Can the solar tax credit be used in combination with other incentives?
In general, you should be able to combine ITC savings with other incentives. Depending on the state you live in, several other solar incentives are available, such as rebates, state-sponsored programs, and other tax credits. Check out our state-specific solar guides to learn more about the incentives in your state:
Should I wait until 2023 to install heat pumps?
We recommend our customers who have already scheduled their heat pump installation for 2022 to stay the course. With heating oil prices already extremely high and rising, a heat pump system installed near the start of the heating season before January 1 will provide maximum fuel savings this heating season. Additionally, with the impending gigantic surge in demand for heat pump installations, no contractor – including ReVision – will be able to meet January’s installation demand, which could mean pushing installations back. to meet demand in February, March or later while you spend top dollar on fossil fuel heating. You should also expect price increases on these systems as demand increases, which will reduce the difference in tax savings capped at $2,000. Finally, the tax credit on your system would not be realized until your 2023 tax return which will not occur until 2024…in over 16 months. ReVision advises you to move forward with your installation now, avoid the rush, maximize your fuel savings and climate impact at the lowest upfront cost we will see in the next decade.
Why is the solar tax credit important?
To achieve the rigorous and necessary renewable energy benchmarks needed to slow the climate crisis, the United States has strengthened federal policies and incentives to help deploy clean energy technologies. While access to solar remains a barrier for some disadvantaged communities, solar deployment has increased rapidly across the country, both at the residential and utility scale. The federal tax credit has given businesses, owners and taxpayers the opportunity to take advantage of reduction in solar costs while increasing long-term energy stability. This allows companies like ReVision Energy to use resources and funding to equitably increase access to solar energy in our communities.