Back in 2005, the US Congress passed a law that allowed homeowners and businesses to obtain a 30% tax credit for installing solar panels. Congress anticipated the bill would provide an incentive for the growth of sustainable and renewable sources of energy. The tax credit had a sunset provision attached to it, which was originally set to end in 2007.
The popularity of the tax credit led Congress to pass extensions. In 2015, the government extended the credit yet again, but is scheduled to start decreasing in 2020. If you want to take full advantage of this tax credit, you’ll want to take advantage of the rebate sooner, rather than later.
How Does the Federal Solar Tax Credit Work?
Through 2019, the solar tax credit will provide a 30% tax rebate on the cost of installing residential or commercial solar systems. Since its inception in 2006, the credit has contributed to growth of more than 5,000% in the US solar industry. In the past decade, the growth in solar use throughout the country has averaged more than 50% annually. Solar currently provides only 2.5% of American energy needs so there is room for additional growth.
The tax credit is better than a mere deduction that reduces taxable income. This is tax credit, which reduces the total amount of income tax you owe. The credit would apply to the cost associated with the installation of a new solar system. Therefore, a solar system that costs $10,000 to install would save you $3,000 on your income tax. If your business is looking to invest in a solar power system, now is the time.
How to Claim the Solar Tax Credit
If you’re looking to claim the entire 30% credit, your new commercial solar system installation needs to be finished by December 31, 2019. Any businesses that complete the installation of a new system after this date will have to take the credit at a lower rate. Additionally, to claim the credit, your business will have to own the building. If you rent, your landlord would be able to claim it instead.
The solar credit applies to all expenses related to the installation of new solar panels. This would include:
- Consultation fees
- Solar panels
- Installer fees
- Costs associated with permitting
- Engineer or electrician fees
You can install the panels yourself if you have the necessary expertise, but you cannot include charges for your own labor to claim a higher cost basis. You’ll want to keep all receipts as proof of your expenses related to the installation of a new system in case of an audit from the IRS. To actually claim the credit, you’ll need to complete Form 3468 if your business files a Schedule C as a part of Form 1040
on your personal return. Corporations will need to fill out Form 1120 rather than Form 1040.
How Does Solar Energy Save Money for Businesses?
Back when the solar tax credit first passed in 2006, the installation of solar panels was cost prohibitive. In the years since, the technology has become much less of a financial burden. That means the tax credit will be worth less than it was back in 2006, but the overall cost of producing electricity from solar energy has come down enough that the total financial benefits will be worth more than they were at that time.
A recent report from 2018 noted that the cost of both residential and commercial photovoltaic systems continues to decline. If you’re a business owner, this should be music to your ears. In the first quarter of 2018, the cost per watt of direct current, also known as Wdc, for commercial systems was $1.83. This was down 2.6% on a year-over-year basis. The overall cost to produce solar energy is about one-third what it was back in 2010. Even with a lower tax credit in terms of the absolute dollar amount, the technology is becoming much more cost-effective for businesses. Even nonprofits that do not pay income taxes will also stand to benefit from installing a photovoltaic system to provide electricity. It’s great for your bottom line, and the environment.
If you’re thinking about installing a solar system for your business, there is an additional benefit. Many states allow homes and businesses to sell electricity back to the grid. This means not only will you be saving money, you may be making money.
When you produce more electricity than you need, you can send it to the electric company and get paid for it in some locations. The amount you’ll get paid is at the utility company’s avoided cost. Even though it’s not what you’ll pay for retail electricity, it’s still better than nothing. It’s a good idea to check if your state will allow you to sell electricity back to the grid and what the specific requirements are in your locality.
When Does the Solar Tax Credit Expire?
Technically, the solar tax credit does not expire for businesses under the current law. It only expires for residential taxpayers in 2022. However, this does not mean you’ll want to wait to install solar power for your business. You’ll only be able to take advantage of the full 30% tax credit in 2019.
Beginning in 2020, the credit will begin to decline over time. In 2020, owners of new commercial systems can only deduct 26% of the cost. The credit drops to 22% in 2021. While the residential tax credit goes away entirely in 2022, the commercial solar tax credit drops to only 10% of the cost of a new system. The commercial tax credit will remain at 10% indefinitely unless Congress passes additional legislation.
Tax Credit as Part of a Solar Financing
If you’re looking to save money on a commercial solar project, it’s important to consider the solar tax credit. Combined with other local and state incentives, you can quickly see a return-on-investment. If you’re thinking of pulling the trigger on solar, contact HOLT Renewables today and we’ll put together a comprehensive solar assessment.