How Solar Tax Credits Work for Businesses and Individuals

Mihai Cristea 22/04/2021 | 16:38

In this modern-day and age, more and more people are becoming aware of the importance of using renewable energy sources to preserve the earth’s natural resources. One of the most viable natural energy sources that are slowly being widely used and accepted by several people and businesses is solar energy. Many governments support the use of this natural resource and encourage their citizens to do so by offering tax incentives to individuals and businesses willing to invest in using solar energy. This article focuses on how solar tax credits work both for businesses and individuals.


Solar Energy Investment Tax Credit (ITC) in Brief

Solar energy ITC originated back in 2006 and it has been designed to drive the renewable energy uptake across the country. To support the deployment of solar energy, the solar energy ITC has even been reshaped in 2015 to offer up to 30% for individuals willing to invest in the use of the sun’s energy for power. Even with the tax reform in 2018, both commercial and residential renewable energy ITCs were maintained.

Because of this, businesses were able to develop long-term investment strategies. However, the solar energy ITC only applies to new solar energy installations. In this case, commercial and residential units are eligible for a 30% tax credit in terms of the cost of the equipment and installation of the renewable energy source. And that is usually performed by a reputable solar engineering company, of course. While the credit percentage may step down each year until 2021 for residential units, commercial establishments tend to enjoy a 10% credit which will remain in place indefinitely.


Tax Advantages of Going Solar

Opting for the use of the sun’s energy to power your home poses plenty of long-term advantages such as not having to rely on the grid. In this case, you don’t get to be affected by power interruptions even during inclement weather conditions for as long as you have stored enough energy from the sun during good weather to power your home. Alongside this, going solar also reduces your overall carbon footprint by minimizing your use of coal and other fossil fuels.

However, the installation of the equipment you need to harness power from the sun and convert it into energy that you can use can be quite costly. This is where the tax incentive proves to be beneficial. Moreover, the tax credit can somehow help you offset some of the upfront costs that you need to shell out to fully go solar. Rest assured that investing in the equipment to leverage the sun’s energy is worth every penny you make because the panels and all the other gears are designed to last for a couple of decades.


ITC Calculation

  • For Homes

For homeowners, the ITC is calculated on the net installed cost of the solar power system equipment. This means that after you have deducted the value of any awarded state rebates, that is the only time that you get to calculate the 30% credit. For instance, if your total system cost reaches $18000, and the state or utility rebates amount to $3000, then the upfront cost where the ITC can be applied would be $15000. 30% of $15000 is $4500 and this will be your offset tax liability.

  • For Businesses

For businesses, the ITC is calculated on the gross installed cost of the solar power system equipment. This means that before any state or utility rebates are deducted, the ITC is first credited. In the same example above, if the total system cost reaches $18000, then the ITC is computed as 30% of this cost. This means that the ITC is 30% of $18000, amounting to $5400 as a credit towards tax liability.


Qualified Equipment

The energy-saving equipment costs that you can claim for ITC include solar-powered units that produce heat or energy, as well as geothermal heat pumps. Even small wind turbines and fuel cell property are qualified energy-saving equipment. Solar-electric collecting roofs, solar power storage equipment, as well as some other installation and labor costs can also qualify as energy-saving equipment.


Solar Energy ITC in 2022

There are some conditions that you need to meet for you to be eligible for the solar energy ITC in 2022. One of these is that your solar PV system must have been placed in service between January 1, 2006, and December 31, 2021. You should also be the one who purchased the solar PV system either through cash or financing. Finally, the solar PV system should be new or being used for the first time. This means that the ITC can only be claimed on the original installation of the equipment and not on re-installation.


Tax Credit vs Tax Rebate

You need to understand that a tax credit is different from a tax rebate. The solar energy ITC is a tax credit which means that it is a dollar-for-dollar reduction in the amount of tax that you otherwise need to settle. On the other hand, tax rebates are payable to you as a taxpayer even if you owe no tax to the government. This means that when you owe no tax due, then you may not benefit from the solar energy ITC. 

For instance, in case you are on a fixed income or when you are retired, then you may not owe sufficient energy taxes to maximize the benefits of the solar energy ITC. You should also keep in mind that the solar energy ITC is a non-refundable tax credit, which means that you don’t get to enjoy a tax refund for any credit that exceeds your tax liability.

There are several advantages of going solar. Apart from saving on your energy bills in the long run, you also get to preserve the earth’s natural resources. However, because the installation of the equipment you need to convert the sun’s energy to power that can be used is quite costly, many people are discouraged to convert to solar. This is where the ICT benefits come in because the initial upfront costs are minimized through the credits that you can garner. Perhaps this is the best time for you to consider switching to the use of the sun’s energy to power your home or your business.

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