How Does the Solar Investment Tax Credit Work?

The Investment Tax Credit (ITC) is currently a 26 percent federal tax credit claimed against the tax liability of residential (under Section 25D) and commercial and utility (under Section 48) investors in solar energy property. The Section 25D residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when homeowners purchase solar systems and have them installed on their homes. In the case of the Section 48 credit, the business that installs, develops and/or finances the project claims the credit.

A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 26 percent of the basis that is invested in eligible solar property which has begun construction through 2019. The ITC then steps down according to the following schedule:

  • 26 percent for projects that begin construction in 2020
  • 22 percent for projects that begin construction in 2021
  • After 2021, the residential credit drops to zero while the commercial credit drops to a permanent 10 percent

Commercial and utility-scale projects which have commenced construction before December 31, 2021 may still qualify for the 30, 26 or 22 percent ITC if they are placed in service before December 31, 2023. The IRS issued guidance (Notice 2018-59) on June 22, 2018 that explains the requirements that a taxpayer must meet to establish that construction of a qualified solar facility has begun for purposes of claiming the ITC.

To find out more information on the federal solar tax credit and calculate the credit amount per year based on household income, Solar-Estimate has a tax incentive calculator and additional detailed information.

Solar on New Residential Homes

If a homeowner buys a newly built home with solar and owns the system outright, the homeowner is eligible for the ITC the year that they move into the house. If the homeowners leases the solar system or purchases electricity from the system through a power purchase agreement (PPA), then the ITC is claimed by the company that leases the system or offers the PPA.

— From the SEIA.org website

Helpful Links for California Residents:

California Energy Commission

California Solar Initiative (CSI) for the California Public Utilities Commission

IRS Form 5695 for Residential Energy Credits 2020

Use Form 5695 to figure and take your residential energy credits. The residential energy credits are:

  • The nonbusiness energy property credit, and
  • The residential energy efficient property credit.

Please click HERE to view and download the form