If you own a home or a second home, you should consider the many benefits of solar photovoltaic (PV) cells/panels. There are cost savings benefits for the reduced payments to the power company, reduced environmental costs as a result of using a more green energy source, and the federal residential energy credit you can claim on your tax return!
The residential energy efficient property section 25D of the tax code allows for a non-refundable credit against your tax owed based on a percentage of the qualified property that is installed. This means that if you install a solar PV on to your first or second home, you can reduce your tax due up to the point that it would create a refund. The percentage that you can take as a credit is currently in three descending divisions that ends on December 31, 2023.
- 30% credit for property placed after 12/31/2016 and before 1/1/2020.
- 26% credit for property placed after 12/31/2019 and before 1/1/2023.
- 22% credit for property placed after 12/31/2022 and before 1/1/2024.
This means that you will need to install your solar PV and have it up and running before the end date of each division to get that credit percentage. Installing your solar PV before the current division ends is important in order to take advantage of the higher percentage rate.
For example: If you spend 20,000 total for your solar PV’s including installation. If done before the end of 2022, you will get a credit for $5,200, but if installation is not complete until 2023, then your credit will only be $4,400. In this case, you will have missed out on a potential $800 reduction in your tax bill!
As the above example demonstrates, the labor costs for installation are included in the calculation of the credit. So both the cost of the solar PV equipment and the costs of the labor for installation are combined to calculate the credit.
You must own the solar PV system. It cannot be leased or claimed in an arrangement whereby you purchase electricity from a solar PV system that you do not own. The solar PV can be placed on your primary home and even on your second home and will qualify for the credit for installing it on both!
This credit is claimed on your tax return for the tax year in which installation is complete. Form 5695 Residential Energy Credits is used to calculate and claim the credit amount and should be attached to your federal 1040 when sent to the IRS.
Solar PV’s are not the only energy efficient items that qualify for the credit! Solar water heating property, fuel cell property, small wind energy property, geothermal heat pump property, and even biomass fuel property all qualify for the tax credit under IRC section 25D. These items are specifically defined within code section 25D, and will not be covered in this article, but you should be aware of the existence of these other qualifying items for your future energy and tax planning.
Your resident state may also have a deduction for energy efficient property; this article only covers the federal credit.
This article is for information purposes only and does not constitute tax advice. Contact your tax advisor for more information or questions.
To learn more about this topic contact Origin CPA Group today.