If you're thinking about installing solar energy – at your home or your business – federal tax credits are available for investments in specific solar energy property. And with these credits scheduled to decrease in the next few years, now is an excellent time to consider this dollar-for-dollar reduction in tax liability based on a percentage of the cost of the qualifying solar property.
Solar energy credits
Thanks to recent federal legislation – the Consolidated Appropriations Act, 2021, approved late last year – extended the "phase-down" of solar energy credits for commercial and residential properties. If you have started work on a solar property or are considering doing so, it's essential to make plans to ensure maximum tax savings. Here's what you need to know about solar energy credit eligibility and optimization for commercial and residential properties:
For your business
Businesses may qualify for the credit under IRC 48 for qualified solar energy expenditures. Eligible property must be tangible personal property for which depreciation or amortization is allowable. Other requirements:
the property must be constructed, reconstructed, erected, or acquired by the taxpayer.
The original use must commence with the taxpayer claiming the credit. In addition, the property must meet applicable performance and quality standards.
With the solar credit decreasing over time, construction start determines to what extent you can maximize the credit. Consider the following:
the solar energy credit is 26% of qualifying costs for construction commencing in 2020, 2021, and 2022.
for construction starting in 2023, the credit drops to 22%. (The credit for construction starting before 2020 was 30%.)
property not in service before 1/1/26 reduces the energy credit percentage to 10%.
Construction commencement occurs when you incur 5% of the final qualifying project costs or when physical work of a significant nature has begun. The taxpayer is required to make continuous progress toward completion once the project has started.
For your home
Individuals may also benefit from the credit for solar property installed on their primary residence located in the U.S. and on a second home such as a vacation property. Consider the following:
the credit for property installed in 2020-2022 is 26% of qualifying property.
the credit is 22% for property installed in 2023. (The credit for property installed before Jan. 1, 2020, is 30%.)
the credit expires after 2023.
qualifying solar property must be new and its first installation.
For residential property, the expenditure is considered made when you complete the original installation of the item. However, in the case of a payment made for the structure construction or reconstruction, the cost is deemed made when the taxpayer's original use of the structure begins.
Solar property may also be eligible for other benefits, such as state credits and federal bonus deprecation.