- Non-Refundable Tax Credit
- Other Incentives
- Credit Qualifications
- Credit Limitations
- Acquisition Options
If you are considering installing a solar electric system or solar hot water system for your home, there are tax issues you should consider when making your decision.
First of all, there is a very lucrative non-refundable federal tax credit for 30% of the cost of the system with no maximum. So for example, if the solar electric system cost you $20,000, your tax credit would be $6,000. A non-refundable tax credit offsets your tax liability, regular and alternative minimum, dollar for dollar, and any excess is added to any credit allowable in the subsequent year. For example, if your 2015 credit was $6,000 and your 2015 tax liability was $4,000, then $4,000 of the credit would go to pay off your 2015 tax liability and the remaining $2,000 would be added to your 2016 solar credit, if any, and used to reduce your 2016 tax liability. This credit, unless it is extended by Congress, will expire after 2016.
Many state and local governments and public utilities also offer incentives, such as rebates and tax credits, for investment in renewable energy property. When deciding whether to make a purchase, you should consider the available incentives and your cost savings for operating the system.
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. 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% for business purposes, only the expenses allocable to non-business use qualify for the credit.
The credit covers both the cost of the hardware and the expenses of installing it, such as labor costs for on-site preparation, assembly, and installation of the equipment and for piping or wiring to connect it to your home. 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 can be taken for a newly constructed home if the costs of the solar power system can be separated from the home construction costs and the required certification documents are available.
Solar installation companies offer a variety of ways to pay for their systems other than cash. You could take out a loan, and if that loan were secured by your home, generally you would be able to deduct the interest on the loan. Another option is to lease the system, in which case you would not qualify for the 30% solar credit and the lease payments would not be deductible. In addition, for the lease option, you would have to deal with transferring the lease to the new owner should you decide to sell the home. (This may entail you paying off the lease or the buyer assuming the debt before the sale can be finalized. Some buyers may not want to take on the additional obligation.) Another option is to allow the solar company to install the solar power system and then purchase the electricity from them. You would not be entitled to the solar credit under the latter arrangement.
If you would like to review your options in more detail, including the tax and other aspects of purchasing a solar system for your home, please give this office a call.