One of the biggest hypes going around the internet, knocking on your front door, or blasting through your TV is all about how you can have solar installed on your house for no cost to you. But, the devil is in the details as they say.
They cook the books by saying that, IF you consider two factors:
- You can take advantage of the 30% Federal Tax Credit (and some states also have credits)
- You add into the figure how much you save on what you were paying for your electricity from the local utility company.
So, basically you have to take out a loan for the entire system and you "pay" it off by claiming tax refunds and not paying as much to the utility companies each month. This means that instead of paying the utility company, you will be paying the loan company until the loan is paid off - generally from ten to twenty years depending on the size of the installation. THEN, it becomes free electricity.
The other little twist to this sales approach is that the Federal Tax Credit is limited to your tax liability. Let's say that you purchased a $100,000 system. Thirty percent of that would be $30,000. However, if you only owed $10,000 in taxes that year, you could only use $10,000 of the credit. The rest rolls over into future years until used up. They generally don't tell you that in their slick presentations.
I'm not saying that you shouldn't take advantage of the solar programs out there. I am considering it myself. However, you need to know the ALL the facts of what you are getting into and that's what I try to provide. Below is a brief synopsis of what the current federal tax laws are:
The Inflation Adjustment Act extended and modified the residential energy efficient property (REEP) credit and renamed it the “residential clean energy (RCE) credit.” This credit was previously set to expire after 2023 and is now extended through 2034. The RCE credit is a credit for solar electric, wind, and other alternative energy equipment installed in the taxpayer’s residence. The credit rates for qualified expenditures are:
- 30% for property placed in service 2022 through 2032 (increased from 26% in 2022 and 22% in 2023 prior to the Act),
- 26% for property placed in service during 2033, and
- 22% for property placed in service during 2034.
The IRS released frequently asked questions in FS-2022-40 providing preliminary guidance on homeowners’ energy credits.
Clean energy expenditures that qualify for the RCE credit
The following clean energy expenditures are eligible for the RCE credit:
- Solar electric property (solar panels)
- Qualified expenditures don’t generally include roofing materials and structural components. However, solar roofing tiles and solar roofing shingles that also serve as solar electric collectors may qualify for the credit.
- Solar water heating property (solar water heaters)
- The property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.
- Fuel cell property
- Small wind energy property
- Geothermal heat pump property
- The property must meet Energy Star requirements in effect when the expenditure is made
- Battery storage technology
- The property must have a capacity of 3 kilowatt-hours or greater
Qualifying expenditures must be for new clean energy property, i.e. used property does not qualify for the RCE credit
Residences that qualify for the RCE credit
Property may be installed in a newly constructed or existing home, but the home must be the taxpayer’s personal residence located in the United States. For fuel cell expenditures, the home must be used as the taxpayer’s principal residence.
If the home is used partly for business purposes, the taxpayer will qualify for the RCE credit if business use is not more than 20% of the home. If business use exceeds 20% the taxpayer may claim only the portion of the credit properly allocable to nonbusiness use. Expenditures for a home used solely for business purposes or not used by the taxpayer at all do not qualify for the credit.
Note that a taxpayer who rents a home as their principal residence may claim the credit.
Calculating the RCE credit
Taxpayers claim the RCE on Form 5695, Residential Energy Credits in the year qualified property is installed, which is not necessarily the year the property is purchased.
The credit is 30% of qualifying expenditures. For fuel cell property, the maximum credit is $500 for each half kilowatt of capacity, or $1,667 for each half kilowatt of capacity if the residence is occupied by two or more individuals. Expenditures include labor costs properly allocable to onsite preparation and assembly, or original installation of the property and for piping or wiring to interconnect the property to the home.
The credit is nonrefundable, but taxpayers may carry the unused credit forward to future years. The credit offsets both regular tax and AMT. There is no lifetime limit for the RCE credit.
Facts and circumstances determine the tax treatment of subsidies from public utilities, rebates, and state energy incentives (see the FAQs). The taxpayer must reduce basis in the residence by the RCE credit claimed.
(On another note, the energy efficient home improvement credit was also extended - doors, windows, etc - and I will have more on that in another blog entry.)