Solar power tax credit essentials
Solar power tax credit essentials
Navigating changing tax laws and getting the most from state and federal tax incentives can result in big savings on your solar panel investment. This briefing by the tax experts at AccountingWEB explains the tax benefits you're entitled to when transitioning your home to solar power. Looking to make the solar switch but not sure where to begin? Connect with an authorized installer to learn more about the Panasonic Total Home Energy System.
Solar power has lots of positives, including a federal tax credit for home and business-owner clients who had panels installed before December 31. Here's what tax pros should know.
Officially it is called the investment tax credit (ITC), but it is also known as the federal solar tax credit. It began as part of the Energy Policy Act of 2005 and has been extended four times since its initial passage. After spending years set at 30 percent of the cost of a solar installation, the credit is now at 26 percent for the next two years. This particular tax credit is quite significant for eligible taxpayers because it gives them a dollar-for-dollar reduction in the amount of income tax they would otherwise owe.
The current 26 percent tax credit will drop to 22 percent in 2023, and if there are no further changes to the legislation, it will disappear for homeowners in 2024. Commercial customers will experience a similar stepdown through 2023, but their credit will be set at 10 percent for 2024 and beyond. Any time the government provides a tax incentive, it is something to cheer about, especially when it is accompanied by local and state incentives.
For example, South Carolina offers a 25 percent state tax credit on solar installations, meaning that Palmetto State homeowners could potentially benefit from a 51 percent credit on the net cost of their solar system between the two tax incentives. And, it doesn't stop there. In states with renewable portfolio standards, utility companies must provide customers with a stated minimum amount of electricity from renewable sources such as solar.
To help meet that quota, utility companies can buy the energy produced by a solar customer's home. A homeowner earns one solar renewable energy certificate (SREC) for every 1,000 kilowatt hours generated by their home and utility companies can be credited for producing that energy by buying the credit. While the value of SRECs will vary by state, this is a true example of taxpayer empowerment.
Where the Government Sits on Solar
The government is so keen on solar power that many other states and municipalities have established property tax exemptions on solar. This means that the added value of solar panel installation will not be counted on property tax fees, giving homeowners and companies more potential savings.
Commercial and industrial businesses located in rural areas with populations of 50,000 or less are eligible to apply for the U.S. Department of Agriculture's Rural Energy America Program (REAP), which provides grants for up to 25 percent of total eligible project costs, and a combined grant and loan guarantee funding of up to 75 percent of total eligible project costs. Those small businesses, including farms, are also potentially eligible for the 26 percent federal tax credit, which could halve the cost of going solar.
How it All Works
After taxes are filed, solar power panels will continue to provide residents and business owners with potential savings year after year. Beyond its impact on tackling environmental issues, solar power panel rooftops give homeowners and businesses the ability to be energy empowered by creating opportunities to resell excess energy, avoid power outages when paired with a battery, and even charge electric cars.
Here's how it works...
When the sun beats down on the solar panels, they create electricity that gives homeowners the potential to reduce their electric bill and carbon footprint. Once the payment to the solar company ends, that energy is completely free to the owner. How much electricity can be made is based on a series of factors, but solar power works all day long even in the rain or dark and gloomy skies.
Another savings to advise clients on is when utility companies offer net metering (the chance to sell back electricity to the grid for a credit on their electric bill). Those utility companies won't cut a check for excess energy produced by the home or business, but they can credit your electric bill.
In one homeowner's situation, a family of seven living in a 3,000-square foot home had electric bills averaging $200 each month. After installing solar panels, their first electric bill was under $10. The electricity generated by the solar panels was first used in the home and then the owners sold the excess energy back to the grid for a credit.
These monthly credits allow an offset of additional energy to draw from the grid to cover further home needs. Solar also had an impact for this particular customer during the refinance of their property because it provided an increase in the home value.
In this case, the homeowner paid off the cost of the solar panel installation, and their energy bill remains a fraction of what it was before. While results vary depending on various factors, this story of this family of seven illustrates some of the potential financial benefits of going solar.
Not everyone will want to sell excess energy back to the grid. It can also be stored by the owner in a battery that can be used to charge portions of your home during power outages. Imagine the cost savings for restaurants who experienced huge financial losses from food waste because of power outages or homeowners who maintain multiple refrigerators and freezers on their properties.
If you installed solar power any time between January 1 and December 31, 2020, make sure you are aware of all the tax credits available to them in the tax filing. As far as the future, your expertise will be much appreciated as you help others determine how to protect and grow the savings created by solar.
This article was written by Jayson Waller from AccountingWEB.com and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to [email protected].