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Could the Expanded Solar Tax Credit Benefit You?

By Steve Isakson, CPA, CGMA

Many homeowners have at least thought about using renewable energy to power their home. If harnessing the power of the sun has been on your mind, now may be a good time to explore your options.

Here's why: the Bipartisan Budget Act of 2018 has extended the renewable energy credits available for individual taxpayers. Adding solar or other "green" energy systems to your home or other residence may be more tax-advantageous than ever before. This is largely because of the availability of a federal solar tax credit, also known as the Residential Energy Efficient Property Credit, equal to the sum of 30 percent of expenses paid for qualifying property.

What type of property qualifies?

  • Solar electric property: Equipment that uses solar power to generate electricity in a home.
  • Solar water heating property: Equipment that uses solar power to heat water in a home.
  • Fuel cell property: Equipment that turns fuel into electricity by electrochemical means.
  • Small wind energy property: Equipment that uses a wind turbine to generate electricity in a home.
  • Geothermal heat pump property: Equipment that uses the ground or groundwater as a thermal energy source to heat or cool a home.

What specific requirements does your solar equipment need to meet?

  • Must be installed in your U.S. residence. To qualify for the credit, the equipment must be installed in a home that is located in the U.S. and that you use as your residence. For fuel cell property, the home must be your main residence. For the other types of property, it can be any U.S. residence you own, not just your primary one.
  • Can't be used for hearing a swimming pool or hot tub. The credit can't be claimed for equipment that is used to heat a swimming pool or hot tub. If the equipment is used more than 20 percent of the time for business purposes, only the expenses allocable to non-business use qualify for the credit.
  • Must be energy-efficient. Each type of equipment must meet energy-efficiency requirements. You can rely on a manufacturer's certification that a component meets those requirements. You don't have to attach the certificate to your return, but you should keep it with your tax records.

How much of a tax benefit can you really expect?

As you may have noticed, the property eligible for the credit is generally quite expensive. For instance, a solar electric system for your home may cost around $20,000—and that's after any rebate. If applied to this property, the credit would equal 30 percent of $20,000, or $6,000.

In addition to the federal tax credit, many state and local governments and public utilities offer incentives such as rebates and tax credits for investment in renewable energy property. In deciding whether to make the purchase, be sure to consider available incentives as well as the cost savings you could realize from using solar energy.

What about installation expenses?

The credit covers both the cost of the hardware and the expenses of installing it. You can claim the credit for labor costs of on-site preparation, assembly, and installation of the equipment and for piping or wiring to connect it to your home. The eligible cost of the property must be reduced by any rebates received. 

When can you claim the credit?

You claim the credit in the year in which the installation is completed. If you install the equipment in a newly constructed or reconstructed home, you claim the credit when you move in.

The credit for fuel cell property is limited to $500 for each 0.5 kilowatt (kw) of capacity. Other than that, there isn't a dollar limit that applies to the credit. What's more, there's no phase-out of the credit based on income, so you can claim it no matter how much income you had for the year.

The credit is allowed against both regular income tax liability and alternative minimum tax (AMT). If the credit exceeds your tax liability, you can carry over the excess to the next tax year.

Act now to make the most of the credit.

All good things must come to an end, including this tax credit. The credit will phase out through the 2021 tax year, so claiming the credit for 2018 or 2019 allows you to apply highest (30 percent) rate. For property placed in service after Dec. 31, 2019, and before Jan. 1, 2021, the credit rate will be 26 percent. For property placed in service after Dec. 31, 2020, and before Jan. 1, 2022, the credit rate will be 22 percent. For property placed in service after Dec. 31, 2021, the credit will no longer be available.

Incorporating solar into your energy systems can take time, so it's wise to start planning your solar projects sooner rather than later. (December 2021 is just under three years away.) If you have questions about how you could benefit, please give us a call. There are also alternative energy tax credits available for businesses, so be sure to read up on those, too.