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How Does the Federal Investment Tax Credit (ITC) for Solar Work?

DECEMBER 7, 2016

A great way to help off-set the cost of your solar installation is the 30% federal tax credit.  It’s one way our country is supporting clean, renewable electricity generation.  We at KW Solar Solutions are solar experts, not tax experts so it would be wise to consult with a tax professional.  Here’s some information on how it works for residences:

The federal investment tax credit (ITC) is a tax credit that can be claimed on your federal income taxes for 30% of the cost of solar PV systems. Use IRS form 5695 with your Form 1040.

The amount of the tax credit is equal to 30% of the cost of all equipment, labor, permitting and inspection fees. For example, if your system from KW Solar Solutions was $20,000 than your tax credit would be [.3 * $20,000 = $6,000].

Utility provided rebates and grants generally decrease your basis in the solar renewable property. The Green Energy Grant in Delaware is a utility provided grant.  For example, if your solar PV system cost $20,000 and you receive a $3,000 Green Energy Grant from Delmarva than your basis in the property for tax credit purposes is [$20,000 – $3,000 = $17,000].  Your federal ITC amount would be [.3 * $17,000 = $5,100].

There is no cap on the amount of the ITC.

You need to have a federal income tax liability to take advantage of this incentive. If your employer withholds payroll taxes, you may receive much of that back since the ITC can offset what you owe in income tax.  So, if you owe $6,000 in federal income taxes after you’ve taken all your deductions you could use the $5,100 ITC (from above example) to reduce your tax liability to only $900.   If your employer withholding is more than $900, you’d get the remainder back as tax return check.

Any unused portion of the tax credit can carry forward to the next tax year. So, if your income tax liability is $4,000 and your ITC is $5,100 you can carry forward $1,100 to next year.

The tax credit can be used against the federal income tax or the alternative minimum tax.

Payments you receive for Solar Energy Renewable Credits (SRECs) is taxable income and does not impact your ITC. KW Solar can help you determine how valuable your SRECs are.

Your solar PV system must be ‘placed in service’ in order to qualify for the ITC. This means that installation is complete, and the utility company has inspected the system and has given you permission to operate.  KW Solar Solutions helps expedite the process with our customers.

You can get the ITC on both your primary home and a vacation home (not a rental home).

If you expand an existing solar PV array you can qualify for the ITC on the cost of the expansion.

Commercial ITC is a little more complex, but still equals 30% of the basis in solar PV with no capped amount.  KW Solar works with commercial, non-profit and agriculture organizations to help sort through how the economics of solar can help them meet their goals.  Again, it’s always best to consult a tax expert to confirm how the tax credit applies in a given situations.

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