What you need to know about Tax Credits Part 1

December 14th, 2012

The end of the year is almost upon us, and since everyone is talking about tax strategies and fiscal cliffs and federal programs, I feel it would be appropriate to discuss tax credits for solar and how you can use them to help install solar for your home or small business. I will warn you, there will be some numbers and a few details involved, so I will try to keep things plain and simple so that you will have a working knowledge of how you can take maximum advantage of the tax credits and programs available to you. I'm going to divide this up into 2 parts and publish separately so you may take in this information slowly and digest and if you have any questions, don't hesitate to ask!

Knowing all the solar tax credits available to you can save a LOT of money when it's time to file your tax returns

Part 1. The Federal 30% Investment Tax Credit.


The Federal Tax Credit was enacted by The Energy Policy Act of 2005, and provides a 30% tax credit to individuals and businesses installing approved solar systems. It was later amended to also include wind and other renewable energy systems. This tax credit is available until December 31st, 2016, or until congress decides to change the law. After the reelection of President Obama, it is probably unlikely that Washington will prematurely end the program, but who really knows, right? Nonetheless, while it is still available, if you are considering putting solar on your home, this is going to be your best friend.

A very good question I hear from a lot of home owners is "What parts of the system qualify for the tax credit?" It is actually quite a bit, and this comes as good news to everyone. The solar modules, wiring, racking, inverters, power point trackers, batteries, piping, and any other parts or materials needed to complete the installation and interconnect to the home counts towards the tax credit. So does the labor, development, on-site preparation, and any additional installer fees that might be included in the final bill. Things that wouldn't be included, for instance, if you decide to build a ground mounted solar array on a newly purchased piece of land. The purchase value of the land is not included into the tax credit equation. Or if you decide to lay a new roof on your home and then put down a solar array. The roof would not be counted towards the federal tax credit. Still, this is quite a relief to many homeowners knowing they are getting a tax credit for nearly all the cost of a new solar system.

You must remember, though, this is a tax CREDIT. You don't receive a check, the amount is not discounted from your installer's bill. You are still required to pay the full amount due for services. The credit is received on your tax returns the following year and you reduce the amount you owe to the IRS by the credit you received from the solar installation. Let's do an example.

You purchase a 5 kilowatt solar system on your home from your local solar installer. The final bill due is $20,000. With the Federal 30% tax credit, you will receive $6,000 in tax credits which can be applied to your tax returns. If you owe $8,000 in taxes, then you subtract $6,000 from $8,000, and now your tax bill will be reduced to $2,000. This is where you get your money back for the installation.

But what if your taxes are lower than the credit you received? Let's say in the previous example you only owed $3,000 in a single tax year. Unfortunately, you can only reduce your taxes to the maximum of what you owe. The government will not issue you a check for the remainder $3,000 credit. Wouldn't that be nice if they did? What you can do, though, is forward the remainder $3,000 in tax credits to the following tax year. So when it comes time to file for the following year, you may apply the remainder to what you owe against future taxes.

So, if you are anticipating recouping all of your tax credits in your first year, you must make sure you have the tax liability to do so! Otherwise you will be forced to take the credits incrementally until they are used up.


In the next part of this discussion I will go over the North Carolina State Tax credit and some online resources you can use to help find additional tax incentives in your home state.


Merry Christmas!