The sun is arguably the most important star in the solar system. Among other functions, it provides light and warmth, helps plants survive, and is an abundant source of Vitamin D. While the sun’s biological benefits are readily apparent, what may be less obvious is how the sun’s presence could impact tax refunds. Thanks to the solar investment tax credit (ITC) and the residential energy efficient property (REEP) credit, the sun now has the power to potentially grant greater savings to taxpayers who make energy-efficient improvements to their homes or office buildings.

The Radiating Benefits of the Solar Tax Credits

With solar tax credits, homeowners and business owners can take 30% of the amount they invest in qualifying solar property as a credit against their tax liabilities. To calculate the tax savings, a CPA will determine the amount of qualifying expenditures, compute the credit based on those expenditures, and then use that solar credit to offset federal tax liability.

CRInsightDeductions lessen a taxpayer’s tax liabilities by reducing the amount of his or her taxable income (and possibly putting that income into a lower tax bracket). By contrast, a credit is a direct offset against the amount owed to the IRS.

 

The 30% credit amount currently applies to commercial and residential construction projects that begin before the end of 2019. The credit amount will drop to 26% of qualified expenditures in 2020 and 22% of those costs in 2021. For residential solar projects, the solar credit is currently scheduled to expire after 2021. Commercial projects that begin construction in 2020 or 2021 may still qualify for the 26% of 22% solar tax credit if the projects are completed and placed into service before the end of 2023.  After that time, the deduction amount for commercial and utility projects will drop to 10%.

It is important to note that solar tax credits have been available since January 1, 2006. Therefore, taxpayers who installed a solar system on or after that date who have not used the credit may be able to obtain incentives by filing an amended return. Note: Amendments are usually limited to the last three years.

“Glaring” Pre-Project Considerations

Before embarking on a solar energy project, taxpayers should first ask a construction professional to conduct a property assessment. This evaluation will help determine, among other things, whether the property needs additional repairs before the project begins. For example, a professional may recommend that a taxpayer replaces the house roof before installing solar panels. Taxpayers should remember to account for installation fees and solar permit prices when estimating project costs.

 Let CRI Help You Identify Your Brightest Solar Tax Credit Opportunities

Even if the upfront costs of your solar energy project are greater than expected, the solar tax credits could offer a sunnier outlook on your investment. Contact our tax professionals for more information on how these credits could help to make your energy-efficient improvements more affordable.