Understanding Home and Business Solar Tax Credits In 2022-2023
Introduction: What are Solar Tax Credits?
A tax credit reduces your income tax owed dollar-for-dollar. For example, if your total tax credits for the tax year 2022 are $3,200, you will subtract $3,200 from the total federal income tax owed.
The solar tax credit is a federal tax credit available to homeowners, renters, and businesses.
If you use solar energy to power your home or business, you may be eligible for the federal tax credit. The credit is worth 30% of the cost of the system, which can help offset your initial investment.
I will explain further details in the paragraphs below.
It is important to note that solar tax credits are also available in some states. This could confuse you, thinking you will not be eligible to claim federal solar credits after benefiting from your state’s credits.
You should not worry because state solar credits do not lower your federal credits. They are available for everyone in all states (at the federal level).
However, when you get state tax credits, it means you have less state taxes to deduct at the federal level, which could result in you paying a tad more in federal taxes.
What are the solar credits amounts?
These solar credit amounts, or percentages, vary depending on when you installed your solar system. And remember, you can claim the solar equipment you installed during the tax year in question.
For example, to claim solar installations installed in 2022, you must do so on your 2022 tax return (to be filed during the 2023 tax season).
You can claim:
- 30% for equipment placed in service in tax years 2017 through 2019
- 26% for equipment placed in service in tax years 2020 through 2021
- 30% for equipment placed in service in tax years 2022 through 2032
- 26% for equipment placed in service in 2033
- 22% for equipment placed in service in 2034
This credit is scheduled to end after 2034 unless Congress decides to extend it.
So, as long as it is in force, take advantage of it because solar equipment is expensive. It is a massive boost for you to claim some of the investment you made in it back through this tax credit.
How Do I Qualify for a Home and Business Solar Tax Credit?
The solar tax credit is a federal incentive that reduces the cost of installing a residential or commercial solar system. The credit provides up to 30% of the total cost of a solar project and is available for both homes and businesses.
To qualify for the tax credit, you must meet certain criteria. See below.
Residential Solar Energy credits
To be eligible as an individual, you must have made energy-saving improvements to your residence, regardless of your state. The types of residence in question can include your:
- House
- Mobile home
- Houseboat
- Cooperative apartment
- Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards
- Condominium
Please note that not all installation costs can be claimed. The IRS sets out rules for the type of equipment eligible for this credit.
Thus, eligible energy-saving installations include solar-powered units that generate electricity or heat water.
You can also claim a percentage of the costs of installing solar-powered storage equipment for 2022. However, a capacity of at least 3 kilowatt hours is required beginning in 2023.
Costs covered in this credit include installation and labor costs, which run into thousands of dollars, sometimes more than $15,000, depending on the size of your home or business.
Business Solar Energy credits
The solar tax credit is also called the solar investment tax credit (ITC). It is also available for businesses located in the United States.
Just like with individuals, the ITC is also up to 30% of the costs of solar equipment installations made and put in service in 2022 or later and begin construction before 2033.
However, the following conditions.
- The business should use new and limited previously used equipment. You cannot classify more than 20% of the eligible value of the solar system as used equipment.
- The equipment installed should not have been leased to a tax-exempt entity, for example, a school, though tax exempt entities are eligible to receive the ITC themselves in the form of a direct payment.
How To Claim the Solar Credit
To claim the solar energy credit in 2022, you must file IRS Form 5695 (Residential Energy Credits) as part of your tax return next year when the 2023 tax season commences.
The credit is calculated on Part I of the form. After arriving at the final figure, you can then go ahead and enter the result on your Form 1040 (U.S. Individual Income Tax Return).
Even as I outlined the above steps, I still encourage you to find a tax professional like me to handle your taxes. This helps to reduce any errors in your calculations. Errors can easily lead to an IRS audit and possible penalties.
If you need me to prepare your 2022 tax return, do not waste time. Contact me now to get started.
Nevertheless, it may happen next year that your solar tax credit is bigger than your income tax due, for example, a $4,000 credit on a $3,500 tax bill.
If that happens, you cannot use the credit to get money back from the IRS (refund). You should carry the credit over to the following tax year. Those are the rules regarding solar or energy credits.
For those of you who failed to claim the solar tax credit in the previous years, you can file an amended return to claim the credit.
I am currently taking clients who want to file amended returns. You may, therefore, also take this opportunity to hire me to help you out during such a busy period when most of you do not want to worry about taxes.
Frequently Asked Questions
- What Does a Tax Credit Mean?
Tax credits differ from tax deductions because you will receive a dollar-for-dollar tax reduction with a tax credit.
Tax credits are designed to offer taxpayers relief from particular costs they incur that they would not be able to deduct elsewhere on their returns, such as childcare expenses.
- What Is the Federal Solar ITC?
The Federal Solar ITC (investment tax credit) is a tax credit that is available to residential, commercial, and utility-scale solar projects.
Taxpayers who purchase and install solar electricity systems may be eligible for the Federal Solar ITC. This tax credit will cover up to 30% of the cost of installing a solar project.
- What are the three types of tax credits
The three types of tax credits are nonrefundable, refundable, and partially refundable tax credits.
Refundable credits benefit taxpayers the most because they are paid out in full. Taxpayers can use this money to buy their daily supplies or invest in an income-generating project.
But a nonrefundable tax credit is not paid out to taxpayers. It can only reduce the tax you owe to zero, but it can’t provide you with a tax refund. Partially refundable tax credits are refunded to a certain percentage – after they have already reduced your taxes owed to zero. Not the full amount is refundable.
