How to Calculate the 30% Federal Solar Tax Credit

January 27th, 2014 |
If you’re buying a solar energy system today, one of the most generous solar incentives that you’re entitled to is the 30% federal Investment Tax Credit (ITC). But not everyone who goes solar is eligible to receive it, and for those who do, there are different ways to calculate it. Below is a FAQ layman’s guide to the solar federal ITC, but please confirm all of this information with your tax adviser.

What’s a Tax Credit?

A tax credit is not a tax deduction. With a tax deduction, you deduct some amount off your gross income to determine your taxable base income. A tax credit is much better. It can be used to pay off your owed federal taxes. So, it’s sort of like receiving an IRS gift card.

Who is Eligible to Receive the ITC?

Any U.S. tax payer who purchases a solar or other renewable energy system is eligible to receive the 30% solar ITC.

 However, if you installed your solar system with a solar lease or a solar PPA, then you’re not eligible, since the leasing company owns your solar system, so they will receive the ITC. But most leasing companies take the value of the 30% ITC into consideration when calculating your lease rate, so you do benefit indirectly.

How Do You Calculate the 30% Solar ITC?

Calculating the 30% ITC differs for homeowners and commercial businesses. Homeowners calculate the 30% on the net installed cost; i.e., after you’ve deducted the value of any state or utility rebates.For example, say the total cost for your solar installation was $15,000 and you received a utility or state rebate of $3,000, your total upfront expense is now $12,000. Consequently, to calculate the 30% ITC:

30% x $12,000 = $3600 tax credit that you can use to pay your taxes to the IRS.

For businesses installing commercial solar projects, the rebate is calculated on the gross installed cost of the solar system; i.e., before deducting for any local or utility rebates. So, using the same example:

30% x $15,000 = $4,500 tax credit that your business can use toward Federal businesses income taxes.

You might think that businesses get a higher ITC formula. However, the IRS considers the $3000 utility rebate as earned income, and therefore the business has to pay tax on that $3000. For residential homeowners, the IRS considers the $3000 as a “reduction in value,” sort of like a sale discount, and therefore it is not taxable.

Is the Value of the 30% ITC Refundable?

What if you’re eligible to receive the ITC, but you don’t owe any taxes this year? Will the IRS send you a refund check for $3000, using the above example? Unfortunately, the 30% ITC is not a refundable credit. However, you can use its value for up to 5 years after installing your solar system, so you’ll be able to use it partially or fully for the following year’s tax bill, or for subsequent years.

Once again, we’re not tax attorneys, so please be sure to verify all of the above ITC information with your tax representative.

In summary, the solar ITC is a very valuable solar incentive if you’re going to purchase a solar system with either cash or a home equity loan. For homeowners that finance their solar systems with a solar lease or a solar PPA, it’s indirectly included in your monthly payments.

Impacts of the new ITC Extensions

The ITC has resulted in an extremely effective subsidy in catalyzing rooftop and utility scale solar energy adoption across the U.S. The multi-year extension from late 2015 has caused the cost of solar to drop while installation rates and technological efficiency improve. The federal investment credit is a perfect example of innovative tax policy investing in 21st century energy system and technology.

Industry experts estimate a total of 27 gigawatts of solar energy has already been installed in the US by 2015, and predict we will have cumulatively nearly 100 GW by the end of 2020. From 2015 to 2017 there was 25% increase in the number of solar industry jobs and forecasted to increase throughout the next decade. The federal solar rebate program is proof that long-term federal tax incentives can drive economic growth, technological innovation to reduce costs, and creating a new generation of jobs and skill sets. To learn more about how this program affects California and/or Hawaii, contact REC Solar.

UPDATE 12/2015: The Solar Investment Tax Credit has been extended! Learn more about how changes to the ITC will benefit commercial solar in 2016 and beyond.
Solar Energy Credits FAQ
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