Renewable energy is the future. Countless homeowners and business owners want to take advantage of the long-term savings and eco-friendliness of solar panel systems, but the upfront investment can be difficult for some to manage. To encourage more people to invest in solar technology, Congress has passed a federal solar tax credit. The approval of the 2016 federal spending budget extended the solar tax credit by five years. You can still take advantage of these significant savings, but time is running out and you’ll need to act soon if you want to claim the tax credit. Bear in mind that other property owners will likely want to take advantage of the tax credit as well, which means solar installation companies expect to fill up their schedules quickly.
Here is how you can become eligible to claim the tax credit.
If you purchase a new solar energy system before the tax credit expires, you are eligible to claim the tax credit. In previous years, legislation required solar systems to be fully operational before their owners could claim the federal tax credit. This requirement has been relaxed. As long as the system has been fully installed and will be operational by December 31, 2023, owners can claim the tax credit. Note that only owners of solar systems can claim the tax credit. If you’re leasing the system or renting a property and don’t own its solar system outright, the tax credit isn’t available. The solar tax credit is available for both residential and commercial property owners. The total qualifying expenses include the following:
- Equipment costs.
- Onsite preparation expenses.
- House wiring costs.
- System installation fees.
Act now to maximize your solar energy savings!
One caveat of the federal solar tax credit is that its savings do not remain consistent over time. This is because the extensions to the Energy Policy Act of 2005 establish a staggered schedule of federal tax savings. The sooner you purchase and install a solar energy system, the more savings you can qualify for with the tax credit. Here’s the complete breakdown of what you’ll save, depending on when you have your system installed.
- Installation through 2019: You can deduct 30% of the total cost of your solar energy system. If you get your solar system installed before the end of the year, you’ll be able to maximize your solar energy savings.
- Installation from 2020 up to 2021: You can still claim the tax credit, but only up to 26% of the total cost of your solar energy system.
- Installation from 2021 up to 2022: The tax credit is still available, but you can only deduct 22% of the total cost of the system.
- Installation from 2022 and beyond: The tax credit will no longer be available. Owners of new solar energy systems can only deduct 10% of the total cost of the system from their taxes.
Here is the process of claiming your federal solar tax credit.
After you’ve purchased a new solar energy system, you might start to actually look forward to doing your taxes. You’ll claim the solar Investment Tax Credit (ITC) with IRS Form 5695. Line one on this form is for “qualified solar electric property costs.” This is where you’ll enter the total cost of your solar energy system. If you’ve also purchased a qualifying solar water heater, you can add that to line two. On line five, you’ll enter the total amount of your qualifying expenses. Then, calculate 30% of this amount (multiply by 0.3) and enter the result on line six. As an example, let’s say that the qualifying expenses for your new solar system total $20,000. Thirty percent of $20,000 is $6,000, so you’ll enter $6,000 on line six.
There is a limit on the amount of federal tax credits you can claim in one year. You can check page four of the instructions for IRS Form 5695. These instructions will walk you through the process of calculating your tax credit limit. If your tax credit is worth more than your total federal tax liability, you can rollover the remaining amount to the next year. This means that, no matter what your tax liability is, it’s still advantageous to purchase and install your solar energy system before the end of 2019 in order to get the full 30% deduction. Note that you should consult a professional tax preparer or certified public accountant (CPA) if you have any questions or concerns about claiming the ITC.
Right now is a great time to take advantage of the solar tax credit extension. Let the expert team at Custom Solar and Leisure help you get started with our free solar evaluation. Our award-winning company has been trusted by residents and businesses in the Tucson area for over a decade. If you’re ready to reap the long-term savings of solar energy, call us today at (520) 314-3768.