What Is it and How Does it Work?

Key Takeaways 

• Businesses and homeowners can enjoy federal tax credits on solar panels, though they differ slightly in amount, qualifications, and time frame. 

• Virtually any taxpayer can qualify for the tax credit on solar panels regardless of income level.  

• The residential solar panel tax credits start phasing out in 2033 and reach zero at the start of 2035, so now’s the time to act. 

Installing solar panels on your home or business comes with a wide range of benefits. The most noticeable of these benefits is the savings you’ll see on your monthly electric bill, but you’ll also reduce your carbon footprint and potentially increase your home or business’ value. 

As if those advantages weren’t incentive enough to purchase solar panels, you can also enjoy other financial incentives that help offset solar panel installation costs. One such incentive is the solar panel tax credit. 

Below, we’ll explore the solar panel tax credit and cover what it is, how to qualify for it, and how to maximize your savings. We’ll also help guide you through the tax credit application process and discuss the future of solar panel incentives. 

What Is the Solar Panel Tax Credit? 

The solar panel tax credits are government-run tax incentives homeowners and businesses can receive for installing solar panels. These federal incentives are officially known as investment tax credits (ITCs) for homeowners and provide a dollar-for-dollar reduction in your income taxes owed. Business owners can choose the ITC or a production tax credit (PTC) per solar panel installation location. 

Solar Investment Tax Credit for Homeowners 

Let’s start with the solar panel ITC. Homeowners can claim up to 30% of the cost to install solar panels on their homes as a tax credit through 2032. Unless Congress renews the program, the maximum credit decreases to 26% in 2033. It decreases again to 22% in 2034 and then expires at the start of 2035. 

This credit has no cap, so it’s 100% based on the cost of the photovoltaic (PV) panel system you install. For example, if the solar system costs $30,000 in 2024, you can claim a $9,000 credit on your income taxes. 

Is this credit refundable? Yes and no. 

It is not directly refundable, as it’s limited by your tax liabilities for the year you claim it. So, if you only owed $5,000 in taxes that year, you can only claim $5,000 in credits. However, with your tax liability going to $0 for that year, you have a good chance of receiving a refund for all income taxes you paid that year. 

On top of this, you can spread the tax credit over multiple years. For example, if you are eligible for up to a $9,000 tax credit and only use $5,000 in the first year, you can use the remaining $4,000 in the following year. 

*Just Energy will help you find a plan that fits your needs. Please note that new plans will come with a new contract and the end date of the new contract will change to reflect the terms of the new plan. There is no fee to make a plan change, but you will be subjected to the terms and conditions of the new plan.

Solar Investment Tax Credit for Business Owners 

When businesses install solar photovoltaic panels, they get very similar tax credits from their version of the solar ITC. What differs are the credit amounts and how far into the future the program lasts. 

Through 2033, businesses can get up to a 30% full-rate tax credit for the tax year the company installed the solar panels. After 2033, things become more fluid, as the program phaseout is based on a soft expiration date of 2036. However, the expiration also depends on when the Treasury Secretary deems we’ve achieved a 75% reduction in annual greenhouse gas emissions. This date of reaching a 75% reduction is called the “Applicable year.” 

If a business installs a solar panel system in 2034 or two years after the applicable year, whichever is later, it receives up to a 22.5% full-rate tax credit. If they install one in 2035 or three years after the applicable year, whichever is later, it receives up to a 15% full-rate tax credit. Without Congressional renewal, the plan expires at the start of 2036. 

The business only receives the full rate if it meets specific labor requirements. These change yearly, but the basics are: 

• All construction, alteration, and repair wages for the first five years of the project for the ITC must at least meet the area’s prevailing rates. 

• An apprentice must perform a certain percentage of the construction labor hours for the project. 

If the business fails to meet these requirements, it receives the base-rate tax credit. The base-rate credit has the same time frame terms as the full rate, but the percentages fall to 6%, 4.5%, and 3%. 

Potential Bonuses in the Business Solar ITC 

The business solar ITC is also subject to various rules that can increase and decrease the tax credit, including domestic content, energy community, and low-income bonuses. Let’s review this complex web of bonuses. 

We’ll start with the domestic content bonus. To meet this bonus, the business must: 

• Use only structural steel and iron produced in the U.S. 

• Have a specific percentage of the total cost of manufactured products produced, manufactured, or mined in the U.S. The percentages are 40% for all projects beginning before 2025, 45% for all projects starting in 2025, 50% for all projects starting in 2026, and 55% for all projects starting after 2026. 

Businesses can also get an energy community bonus for building their solar project on specific sites. To qualify for the energy community bonus, the business must build in an area that: 

• Has been contaminated by the presence of pollutant, hazardous substances, or other contaminants 

• Has 0.17% or more direct employment or 25% or more local tax revenues related to extracting, processing, transporting, or storing coal, oil, or natural gas. The area must also have an unemployment rate at or above the national average for the previous year 

• Has a census tract showing a coal mine closed after 1999 or the retirement of a coal-fired electric plant after 2009 

If the business meets either the domestic content bonus or energy community bonus, it receives a tax credit bonus of: 

• 10% for projects started by 2033; 2% if the business fails to meet the labor requirements 

• 7.5% for projects started in 2034 or two years after the applicable year; 1.5% if the business fails to meet the labor requirements 

• 5% for projects started in 2035 or three years after the applicable year; 1% if the business fails to meet the labor requirements 

Businesses can also qualify for two low-income bonuses. They can receive a 10% tax credit bonus for building their solar projects with under 5 megawatts (mW) of power in a low-income community or on Native American land. Alternatively, they can get a 20% bonus for building a sub-5-mW solar project classified as a “qualified low-income residential building project” or a “qualified low-income economic benefit project.” 

Production Tax Credit for Businesses 

One big difference between the homeowner tax credit for solar panels and the credit for businesses is the latter has a second credit option, the production tax credit (PTC). Instead of receiving credit for the solar panel cost, the PTC offers credit for the solar energy created. 

The PTC system has the same requirements for getting full-rate credit versus base-rate credit as the ITC. It also has all the same requirements for receiving domestic content and energy community bonuses. What it lacks is a low-income bonus. 

The full-rate PTC is 2.75 cents per kilowatt-hour (kWh) produced for 10 years for all projects built from 2023 through 2033. 

After 2033, the phaseout begins, and the credit amounts are as follows: 

• If a business installs a solar panel system in 2034 or two years after the applicable year, whichever is later, it can receive a full-rate credit of 2 cents per kWh for 10 years.  

• If a business installs one in 2035 or three years after the applicable year, whichever is later, it can receive a full-rate credit of 1.3 cents per kWh. Without Congressional renewal, the plan expires at the start of 2036. 

If the business fails to meet the labor requirements, they receive only the base rate credits. These follow the same timeline as the full-rate credits but are 0.55 cents per kWh, 0.4 cents per kWh, and 0.3 cents per kWh. 

Potential Bonuses in the Business Solar PTC 

Like the business solar ITC, the PTC program has bonuses. Qualifying businesses can get the domestic content and energy community bonuses, and they follow the same eligibility rules as the ITC bonuses listed above. 

If the business meets either the domestic content bonus or energy community bonus, it receives a tax credit bonus of: 

• 0.3 cents per kWh for projects started by 2033; 0.1 cents per kWh if the business fails to meet the labor requirements 

• 0.2 cents per kWh for projects started in 2034 or two years after the applicable year; no bonus if the business fails to meet the labor requirements 

• 0.1 cents per kWh for projects started in 2035 or three years after the applicable year 

How to Qualify for the Tax Credit for Solar Panels 

Homeowners have specific requirements they must satisfy to qualify for the federal solar tax credit. The homeowner eligibility requirements are as follows: 

• You must install your solar energy system between January 1, 2024 and December 31, 2034. 

• You must also wholly own the solar equipment or purchase interest in an off-site community solar project — you cannot lease the panels from the solar company. 

• The solar PV equipment must be new, and this installation must be its first time used. 

Solar tax deductions for businesses also have strict regulations, though they are a bit more relaxed than those for individuals. These eligibility requirements are as follows: 

• The solar electric project must be in the U.S. or a U.S. territory. 

• The solar equipment generally must be new, but the Department of Energy allows businesses to qualify for these solar incentives with used equipment making up 20% of the solar system’s eligible value. 

• The solar equipment may not be leased to a tax-exempt entity. 

Maximizing Savings with Solar Panel Tax Credits 

The advantage of the solar panel tax credit is it lowers solar panels’ upfront cost by reducing your tax bill. This incentive lets homeowners and businesses receive a hefty percentage of the original installation cost of their solar panel system, including labor costs, as a credit on their federal tax returns. When you take advantage of this credit, you make environmentally friendly choices while saving money in the long run. 

While homeowners cannot directly increase their tax credit for solar panels, they can take several actions to ensure they complete the application correctly and stack other solar credits on top of the federal credit. Let’s review some tips to ensure you maximize your solar tax credit: 

1. Install before the phaseouts begin: Take advantage of the highest possible tax credits by installing your solar panels system before January 1, 2034. Barring Congressional action, this is when the tax credit phaseout begins, lowering the credit from 30% to 26%. 
2. Consult the professionals: When setting up your system, consult a solar system professional who can guide you to the right system to ensure you get the highest tax credit. Also, when claiming your solar credit on your tax returns, consult a tax professional to help you claim the credit correctly on your federal income tax return. 
3. Combine with other financial incentives: Check for local or state solar incentives available that you can stack on top of the federal tax credit for solar panels. In many cases, you can combine multiple incentives to reduce the cost of your solar panel installation even further. 
4. Apply for net metering: Net metering is when the power company measures the amount of electricity your solar system puts back into the electricity grid. This can create a surplus that can result in credits on your power bill or even large payouts to you to offset the solar installation further. 

Business owners will want to follow the same recommendations as homeowners to maximize their solar tax credit. However, they can further maximize it by ensuring they qualify for the bonuses mentioned earlier, including the low-income, domestic content, and energy community bonuses. 

Navigating the Application Process for Tax Credits 

The solar panel tax credit application process is relatively straightforward, but you must gather all the necessary documentation and follow the correct procedures. Let’s review the general steps you need to follow: 

1. Consult a tax professional: As we mentioned, have a tax professional advise you throughout the application process and provide accurate information. 
2. Gather documentation: Collect the documentation required to prove the cost and installation of your solar panel system, including proof of purchase, installation agreements, and any other supporting documents the IRS requires. 
3. Complete IRS Form 5695: Fill out IRS Form 5695, the Residential Energy Credits form, which is used to claim the solar panel tax credit. 
4. File your tax return: Include the completed Form 5695 with your tax return when filing. Make sure you keep copies of all documentation for your records. 

Common Misconceptions About Solar Panel Tax Credits 

Some people have misconceptions surrounding the solar panel tax credit that are worth addressing: 

• Only for wealthy individuals: Some may believe the tax credit for solar panels only benefits higher-income individuals. The credit is available to any taxpayer who installs a qualifying solar panel system, regardless of their income level. 

• Exclusively for homeowners: While many installations are on residential properties, businesses, nonprofits, and government entities can benefit from the solar panel tax credit. 

Homeowner and Business Benefits of the Tax Credit for Solar Panels 

Homeowners and business owners can enjoy various benefits from the tax credits for solar panels. Some of the more important ones include: 

• Financial savings: The solar power tax credit significantly reduces the cost of going solar. This, in turn, shortens the payback period for your investment — the time it takes for the solar energy generation to pay off the cost of the panels. You also enjoy lower energy bills and potential property value increases, contributing to long-term savings. 

• Environmental impact: When you harness clean, renewable energy from the sun, you help reduce your carbon footprint and create a more sustainable, energy-efficient future. 

• Energy independence: When you generate electricity through solar panels, you’re less reliant on traditional utility companies and rising energy costs. Plus, adding solar panel battery storage allows you to store excess energy you can use during blackouts and at night. 

• Business advantages: For businesses, investing in solar panels can enhance brand image, attract environmentally conscious customers, and qualify them for additional tax incentives or rebates. 

• Increased solar adoption: Emerging technology requires funding, which often comes from early adopters. Though solar is one of the older renewable energies, it still has a lot of growth and advancement. These tax credits can help increase adoption rates and help push solar technology forward. 

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Go Green and Save Green With the Tax Credit for Solar Panels 

The tax credit for solar panels is a valuable incentive that can help push businesses and homeowners toward switching to solar energy by making the upgrade more affordable. However, the qualifications and application process may still seem overwhelming to some, making them wait to switch. Once you fully grasp the application and qualification process outlined above, you should be ready to switch to a more sustainable energy source. On top of that, you also learned how to maximize savings and dispelled common misconceptions clouding your decision. 

You’re now ready to take full advantage of this immediate financial benefit and enjoy the ongoing financial benefits solar panel installation offers. 

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