Congress bolsters solar tax credit as part of the Inflation Reduction Act

Home and business owners wanting to go solar received a fresh financial incentive thanks to the passage of the inflation reduction act.

It’s a major win for the solar industry and clean-energy advocates, as the federal solar tax credit has been extended and restored to its full rate of 30% for ten years beginning in 2022. This means homeowners and businesses can continue to take advantage of a significant solar tax incentive when they choose to install solar and/or a battery storage system.

The legislation will lower energy costs for Americans, provide domestic energy security and new manufacturing, decarbonize all sectors of the economy, bolster environmental justice, and increase energy resilience in rural communities. Let’s look more closely at what the inflation reduction act does for the solar industry.

Federal solar tax credit for homeowners

Over the past year, homeowners interested in solar and battery storage have seen the federal solar tax credit decrease. Prior to this bill, the credit had dropped to 26% for systems installed this year and was slated to decrease to 22% in 2023 before expiring altogether in 2024.

Inflation Reduction Act Provides Solar Tax IncentivesThe Inflation Reduction Act allows homeowners to take advantage of the full 30% tax incentive for systems installed during the decade between 2022 and 2032 before gradually phasing out by 2035. As a major solar incentive, the newly branded “residential clean energy credit” will help millions of homeowners afford the upfront costs of a solar energy system in order to realize its long-term benefits.

Here’s what’s new with the federal solar tax credit for residential solar installations:

  • 30% tax credit if placed in service between 2022-2032
  • 26% tax credit if placed in service in 2033
  • 22% tax credit if placed in service in 2034
  • Includes all storage systems of at least 3kWh, regardless if paired with solar or not

How the solar tax credit works:

Residential taxpayers can apply a credit to their federal income tax return at the end of the year in which their system went into service based on the total price of the system. The solar tax credit is not refundable, but can still be carried forward to future years if you can’t use the full amount in one year. Note that it’s still unclear how many years you can carry forward your tax credit.

What’s not in the bill:

The cost of a new roof is still not included in the tax credit unless that roof is a solar energy-producing roof shingle product.

Federal solar tax credit for businesses

As with residential, commercial solar projects have a solar tax incentive restored under the Inflation Reduction Act. The Investment Tax Credit (ITC) gives businesses access to a 30% tax credit, however, certain provisions must be met in order to qualify for the full amount. For example, large commercial systems over 1 Megawatt (AC) in size must adhere to certain wage and apprenticeship requirements to be eligible.

There is also an additional 10% bonus credit eligible to businesses that purchase systems built with U.S.-manufactured products and materials, allowing some projects to qualify for a 40% tax credit. President Biden has previously supported domestic solar manufacturing by invoking the Defense Production Act, which accelerated American manufacturing of solar panels and complementary equipment. There are additional tax incentives in the Inflation Reduction Act to spur domestic manufacturing and recycling of clean energy products.

Basics:

    • Extension of the credit legislation
    • New provisions for varying levels of ITC depending on labor and equipment
    • When a project starts will determine what rules are applied
    • Storage qualifies on its own, regardless if paired with solar
    • Direct pay to nonprofits, government agencies, and federally recognized tribal authorities
    • ITC can be reassigned to another entity

Non-residential systems qualify for a 30% investment tax credit if either condition is met:

    • System size <1 MW AC; or
    • Pay prevailing wages and adhere to apprenticeship requirements
    • Additional 10% bonus credit if the project is located in an Energy Community
    • Additional 10% bonus credit if using Domestic Content

Business ITC is based on when a project starts:

  • 30% credit if commence construction by the end of 2032
  • 26% credit if commence construction in 2033
  • 22% credit if commence construction in 2034
  • 10% credit if commence construction after 2034

Frequently asked questions about the federal solar tax credit

Note: These are the rules as we understand them and should not be depended on. As with all tax credits, please consult a tax professional before making financial decisions.

How do I know if I’m eligible to receive the federal solar tax credit?

Date of installation: Homeowners can claim the residential clean energy credit in the year the system went into service. It does not matter when you paid for the system. Business owners eligible for the investment tax credit will use the construction commencement date.

Location: Your solar PV or energy storage system was installed on your primary or secondary residence in the United States. Non-owner occupied rental properties and commercial properties do not qualify for the residential clean energy credit but are eligible for the business investment tax credit.

Ownership: You own the solar PV or energy storage system, meaning you purchased it outright or financed it with a loan.

Original Installation: Your solar PV or energy storage system is new or being used for the first time—the credit can only be claimed on the original installation of the equipment. For instance, if you bought a house that came with a solar system already installed, you would not be eligible for the credit.

What about systems already installed in 2022? Do I get a solar tax credit?

Yes! Solar energy systems and battery storage systems installed anytime in 2022 will now be eligible for a full 30% credit.

What about systems installed in 2021? Should I have waited?

True, the tax credit is higher now, but prices have increased significantly since then due to inflationary pressures and material supply shortages. (You still got the better deal in 2021!)

How long does it take to install a residential solar system?

Solar installation is fairly straightforward and usually takes between one and three days, depending on system size and installation complexity.

What forms do I need to apply for the residential clean energy credit?

Form 5695 – Residential Energy Credits

How long do solar panels last?

Generally, solar electric panels will produce power for 30-50 years. Manufacturers usually warranty the power output for 25 years, but most people agree they’ll continue producing well beyond that.

Some balance of system (BOS) components may need to be replaced before the solar panels lose their effectiveness, including the inverter, which typically has a 10-year or 25-year warranty.

Can I include the cost of my roof with my tax credit?

NO! The code and rulings are very clear that roofing materials do not qualify for the tax credit.

Will my utility now pay me for excess energy?

Nothing has changed with our local policies as part of this federal package. See this page for more information on net metering and how exporting to the utility works.

Are there federal tax incentives for battery storage systems?

Yes. Both the residential clean energy credit and the business investment tax credit now allow battery systems to qualify, regardless if they are paired with a solar PV system or not.

What other solar incentives can be used along with the federal solar tax credit (ITC)?

Along with the federal solar tax credit, there may be additional solar incentives provided by state-sponsored programs and rebates, as well as local utility incentives. If you live in Washington State or Oregon, just fill out this form, and we’ll be happy to let you know if incentives are available in your area.