The Solar Investment Tax Credit (ITC), also known as the Solar Tax Credit, was first introduced by the Federal Government in 2006 to support the growth of solar energy, allowing home and business owners to deduct a percentage of the cost of installing a solar energy system from their federal taxes. The ITC applies to both residential and commercial properties and there is no limit on its value. Homeowners also can use the federal tax credit towards battery storage, installing new systems
The Investment Tax Credit (ITC) is currently a 26% federal tax credit claimed against the tax liability of residential and commercial and utility investors in solar energy property. The residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when homeowners purchase solar systems outright and have them installed on their homes.
How does the solar tax credit work?
The federal solar tax credit can be claimed by any U.S. home or business owner, so long as the solar system installed is for a residential or commercial location based in the United States. (It does not have to be your primary residence.) As long as you own your solar energy system, you are eligible for the solar investment tax credit. Even if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” the remaining credits into future years for as long as the tax credit is in effect. However, remember that if you sign a lease or PPA with a solar installer, you are not the owner of the system, and thus you are not eligible to receive the tax credit.
Am I eligible to claim the federal solar tax credit?
You’re eligible to claim the federal solar tax credit if:
- You install and own a solar energy system between January 1st, 2006, and December 31st, 2023.
- Your solar energy system is financed or paid in cash (solar leases are not eligible to receive this credit).
- Your solar energy system is new or being used for the first time. The ITC can only be claimed on the “original installation” of the solar equipment.
- You have taxable income.
How Long Will the Federal Solar Tax Credit Stay in Effect?
The United States Congress passed an extension of the Energy Policy Act of 2005’s ITC provision, which provides a 26% tax credit for systems installed from 2020 to 2022. In 2023, owners of new residential and commercial solar systems can deduct 22% of the cost of the system from their taxes, while in 2024, owners of new commercial solar energy systems can only deduct 10% of the cost of the system from their taxes. There is no federal credit for residential solar energy systems as of 2024.
How Do You Claim the Solar Investment Tax Credit?
The solar tax incentive is claimed as part of your annual federal tax return. To claim the federal solar tax credit, follow these steps:
- Download IRS Form 5695 as part of your tax return. This residential energy tax credit form can be downloaded directly from the IRS.
- Calculate any tax liability limitations using the Residential Energy Efficient Property Credit Limit Worksheet.
- Add your renewable energy credit information to your typical IRS Form 1040.
We recommend that you consult a tax expert, as well as your solar company, to ensure that you are correctly claiming the federal solar tax. As a reminder, the tax credit only offsets the taxes you owe on your return. If the taxes you owe are less than the credit you earn, the credit will roll over from year to year.
Each state has its own set of solar incentives that vary significantly. Different agencies offer different solar financial incentives, so consult your installer and check the Database of State Incentives for Renewables & Efficiency for further information.