Written by Sarah Lozanova

There are tax incentives available for both homeowners and businesses to save with solar energy. The solar tax credit, known as the investment tax credit (ITC), reduces the net cost of installing a solar energy system.  

This valuable solar incentive will taper down next year from 26% where it is currently. In 2021, the solar credit will be 22%. Unless extended, it will be discontinued at the end of 2021 for residential systems and remain at 10% for businesses. 

That means you can get the biggest tax credit if you install your system in 2020. This is a great year to go solar!

What tax incentives are available for installing solar panels?

The federal tax credit can lower the net cost of your solar system by 26%. This tax credit can be applied to the total cost of the project, including the solar panels, inverter, batteries, and labor. That means that a $15,000 solar system can qualify for a $3,900 tax credit! Also, businesses can qualify for a write-off or bonus depreciation.

Residential Solar Incentives

How does the solar tax credit work?

A tax credit is a dollar-for-dollar reduction in federal income taxes owed to the government. It is different than a tax write-off and is more valuable to the taxpayer. If you install your solar system in 2020, you will see the benefits of the tax credit when you file your 2020 taxes at the beginning of 2021. Speak with your tax professional to determine if you qualify for the ITC.

How can I take advantage of the federal tax credit?

To claim the federal solar tax credit, complete the IRS form 5695 and add that information to your 1040. Speak with your tax specialist to determine if you qualify. 

Commercial Solar Incentives

What tax incentives are available for commercial solar systems?

Two tax incentives exist for installing a commercial solar system. There is a 26% federal tax credit that is available for businesses that install solar systems. In addition, there is also a tax write-off. Under the “Tax Cuts and Jobs Act,”  Congress doubled the amount of bonus depreciation that can be claimed for commercial solar installations. Businesses can now apply 100% depreciation for the expense of a solar panel system in year one instead of spreading it out over six years.

What is depreciation?

From a tax perspective, depreciation is considered an expense to businesses, and it lowers the profits that are reported for tax purposes. Depreciating capital expenses allows companies to allocate the upfront cost of an investment over time. Previously, businesses could only depreciate 50% of the cost of a solar system in the first year. Most businesses then depreciated the remaining 50% over five and a half years. 

With the bonus depreciation, businesses can take 100% depreciation for the cost of the solar system in year one and also take the ITC for 26% of the system cost. These two tax incentives significantly shorten the payback period of the solar system and boost the ROI.

Are non-profits eligible for the solar tax credit?

Unfortunately, non-profit organizations are not able to directly take advantage of the tax credit. As a result, many non-profits purchase their systems with power purchase agreements (PPAs), rather than owning the system.

Want to learn more about how much you can save with a solar energy system? Contact Solar Plus today for a free phone consultation!