Solar energy helps in reduction of pollution and electricity costs. The benefits of solar energy have encouraged the federal government to provide various incentives to American citizens. One of them is the Solar Tax Credit. If one is planning to install a new solar energy system, it is essential for him to understand the benefit of this tax credit.
Solar Tax Credit or Federal Solar Investment Tax Credit is a tax subsidy that allows homeowners and commercial establishments to deduct a certain percentage of the installation cost of a new solar energy system on their establishments.
There is no limit on the amount that can be claimed as the solar tax credit. It can be claimed only once. If it is not adjusted in the tax liability of one year, the remaining percent can be claimed next year or till it is exhausted.
It was originally established through Energy Policy Act, 2005 and was supposed to expire by 2007. However, lobbying by environment activists and energy industries extended it to 2016. It was further extended until 2022 in 2016.
As per the present provision of law, the tax credit can be claimed as soon as the construction is started or completed. However, it should be operational by December 31, 2023. All systems must be placed after January 1, 2006, and before December 31, 2021.
The tax credit can be claimed if the solar energy system is owned by the taxpayer, be sure to get a professional to help with calculating srec price. It is not meant for those who have taken the system on the lease or the rent. There are different rates of solar tax credit according to years in which the system is installed by the taxpayer-
1. 2016-2019- 30 percent tax credit for both homeowners and commercial establishments.2. 2020- 26 percent tax credit for both homeowners and commercial establishments.3. 2021- 22 percent tax credit for both homeowners and commercial establishments.4. 2022- 10 percent tax credit for commercial establishments only. Homeowners can’t claim the solar tax credit.
The credit is calculated on the total cost of installing the new solar energy system. It would include costs of tools, machinery, and labor. One can claim the tax credit while filing annual tax returns. It can be claimed through one page IRS Form 5695. It is advisable to provide receipts of expenditure incurred on the installation of the solar energy system.
To understand hows solar tax credit works, let us take the example of Mr. Andrew-
Andrew installed a solar energy system worth 4000$ in his home. He bought few tools and equipment worth 500$ to install it. The total cost of the installation would be 4500$. His tax liability is 4000$ in that year. He can claim the tax credit of 4000$ in that year. Next year, his tax liability is 5000$, and out of that, he can claim 500$ as the rollover solar tax credit from the previous year.
However, if Andrew’s tax liability was zero in both years; he can’t claim the refund. It will roll over to the third year. The tax credit must be exhausted until December 31, 2023.
Such move of the federal government is going to encourage Americans to support solar energy systems and other forms of renewable energy systems.