The Inflation Reduction Act Gives the Solar Tax Credit New Life
- Learn about the effective years of the solar tax credit.
- Find the solar tax credit percentage.
- Learn about the credit requirements for battery storage technology.
- Is solar worth the cost?
- The solar tax credit is non-refundable. Find out what that means for you.
- Learn about the maximum solar tax credit.
- Learn about qualifying property.
- Find out who gets the credit.
- Learn about the timing of the credit.
- Find out if the credit is available for multiple installations.
- Find information regarding installation costs.
- Learn about basis adjustment.
- Find out how the credit applies to association or cooperative costs.
- Get information about the application of the credit with mixed-use property.
- Learn how the credit applies to newly constructed homes.
- Learn about the utility subsidy.
- Find information about leased installations.
The Inflation Reduction Act signed into law by President Biden on August 16, 2022, gives new life to the federal solar tax credit. This applies to the purchase and installation costs of residential solar-power systems. It also provides guidelines allowing batteries to also qualify for the credit.
The Solar Tax Credit Extended
The solar credit is a percentage of the cost of a solar electric system installed on a taxpayer’s first or second residence located in the U.S. Before the passage of the Inflation Reduction Act, the solar tax credit was being phased out by slowly reducing the credit percentage from 30% to 22% over several years. The credit was also scheduled to end after 2023. The Inflation Reduction Act extends the credit through 2032 at 30% before phasing it out in years 2033 and 2034.
Those who qualify for the solar tax credit in 2022 will receive a bonus, as the credit for 2022 was 26% under the prior law phase-out, but the legislation has returned the credit to 30% for 2022. The following table summarizes the credit for the past and future years under this new legislation.
Emergency power outages imposed by utilities in fire-prone areas during periods of high winds and low humidity, as well as in other disaster areas, cause a major inconvenience, especially for those that work from home, resulting in many taxpayers asking if storage batteries added to a solar installation would qualify for the credit.
Before this law change, the IRS had issued a private ruling indicating that they would be allowed. However, the tax code was silent on whether storage batteries were eligible for the credit. The Inflation Reduction Act of 2022 amended the code by adding and defining the term “qualified battery storage technology expenditure”. Thus, clarifying that for expenditures made after December 31, 2022, battery storage technology that meets the following requirements will qualify for the credit:
(A) Installation occurs in connection with a dwelling unit in the United States used as a residence by the taxpayer, and
(B) It has a capacity of not less than 3-kilowatt hours.
Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery.
Is a Solar System Appropriate For Your Circumstances?
TV ads tout how little your electric bill will be after you have a solar system installed. But they fail to consider the cost of the system itself and subsequent system maintenance.
When you are making the decision whether to acquire a home solar system, you need to factor in the cost of the system (and the interest you will be paying if you are financing it) as compared to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system worth the cost? Electricity costs can vary significantly according to locale.
Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages; you may simply want to go green or go off the grid where electric service is not reliable.
If you plan to go ahead with a solar installation, here are some of the issues you need to be aware of.
The Solar Tax Credit Is Non-Refundable
The credit is nonrefundable, meaning it can only reduce your tax liability to zero. However, taxpayers may carry over the portion of the credit not allowed because of this limitation to the next tax year and add it to the credit allowable for that year.
Maximum Solar Tax Credit
No specific maximum exists. However, since it is not a refundable credit, the benefit may be spread over several years. If not utilized by the time the credit phases out, you may not get the benefit of the entire credit.
Example: Suppose in 2022, your solar installation costs $25,000 and you completed the installation in 2022. That would qualify you for a solar tax credit of $7,500 ($25,000 x 30%).
But suppose the income tax liability on your 2022 tax return is only $3,000. Then, the credit would reduce your tax liability to zero. The other $4,500 ($7,500–$3,000) of the credit carries over to your 2023 tax return. Then, the credit will be limited to that year’s tax amount. If your tax again equals less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or the credit expires. So, if you are expecting the credit to offset your outlay for the cost in the first year, you may be in for a surprise.
Both a taxpayer’s main and secondary residence qualify for this credit.
Who Gets the Credit?
It may come as a surprise, but you need not own the residence where the solar property is installed to qualify for the credit. You need only be a “resident” of the home. The tax code does not specify that an individual must own the home, only that it is their residence.
Example: A son lives with his mother, who owns the home. The son pays to have the solar system installed. So, the son is the one who qualifies for the credit.
When is the Solar Tax Credit Available?
Taxpayers may claim the credit on the tax return of the year during which they complete installation.
Example: If you purchase and pay for a system installation completed in 2022, you may claim the credit on your 2022 return. However, if you pay for the installation in 2022, but do not complete the installation until 2023, then you must claim the credit on your 2023 return.
The credit is available for multiple installations. For instance, after the initial installation, if you add additional solar panels to increase capacity, these would be treated as original installations and qualify for credit at the credit rate applicable for the year the additional installation was completed. On the other hand, if you had to replace damaged panels or perform other maintenance on the system, these costs do not qualify as an original system and would not qualify for the credit.
Amounts paid for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit—or for piping or wiring connecting the property to the residence—are expenditures that qualify for the credit. This includes expenditures relating to a solar system installed on a roof or ground-mounted installations.
With respect to a home, the term “basis“ generally refers to the cost of the home plus improvements. It is the amount subtracted from the sales price to determine the gain or loss when the home is sold. The cost of a solar system adds to a home’s basis, but because the solar credit is a tax benefit, the credit reduces the basis. This will generally create a different basis for federal and state purposes where a state does not provide a solar credit or it differs from the federal solar credit amount.
Association or Cooperative Costs
What if you are a member of a condominium association for a condominium you own or are a tenant-stockholder in a cooperative housing corporation? Then you are treated as having paid your proportionate share of any qualifying solar system costs incurred by the condo, cooperative association, or corporation.
In cases in which you use a portion of your residence for deductible business or rent part of your home to others, you must prorate the expenses. You can only use your personal portion of the qualified solar costs to compute the credit. An exception exists if you use 20% or less of the property for business purposes. In this case, the full amount of the expenditure is eligible for the credit.
Newly Constructed Homes
Planning on purchasing a newly constructed home that includes a solar system? You may be entitled to claim the solar credit. However, to do so, the costs of the solar system must be stated separately from the home construction costs and the appropriate certification documents must be available.
Some public utilities provide a nontaxable subsidy (rebate) for the purchase or installation of energy-conservation property. In that case, the cost of the solar system eligible for the credit must be reduced by the amount of the nontaxable subsidy that was received, so only your net cost is eligible for the credit.
When a solar installation is leased, the lessor gets the credit, not the home resident.
As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? Before signing any contract to make sure a solar system is appropriate for you tax-wise, call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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