Homeowner's Guide to the Federal Tax Credit for Solar Photovoltaics

Homeowner’s

Guide to the Federal

Tax Credit for

Solar Photovoltaics

Disclaimer: This guide provides an

overview of the federal investment

tax credit for those interested in

residential solar photovoltaics, or PV.

It does not constitute professional

tax advice or other professional

nancial guidance. And it should

not be used as the only source of

information when making purchasing

decisions, investment decisions, or

tax decisions, or when executing other

binding agreements.

What is a tax credit?

A tax credit is a dollar-for-dollar

reduction in the amount of income tax

you would otherwise owe. For example,

claiming a $1,000 federal tax credit

reduces your federal income taxes

due by $1,000.

What is the federal solar

tax credit?

• The federal residential solar energy

credit is a tax credit that can be

claimed on federal income taxes for

a percentage of the cost of a solar

photovoltaic (PV) system.

(Other

types of renewable energy are also

eligible for similar credits but are

beyond the scope of this guidance.)

• The system must be placed in service

during the tax year and generate

electricity for a home located in the

United States. There is no bright-line

test from the IRS on what constitutes

“placed in service,” but the IRS has

equated it with completed installation.

• In December 2020, Congress passed

an extension of the ITC, which

provides a 26% tax credit for systems

installed in 2020-2022, and 22% for

systems installed in 2023.

The tax

credit expires starting in 2024 unless

Congress renews it.

• There is no maximum amount that

can be claimed.

Am I eligible to claim the

federal solar tax credit?

You might be eligible for this tax credit

if you meet all of the following criteria:

• Your solar PV system was installed

between January 1, 2006, and

December 31, 2023.

• The solar PV system is located at

your primary or secondary residence

in the United States, or for an off-site

community solar project, if the

electricity generated is credited against,

and does not exceed, your home’s

electricity consumption.

• You own the solar PV system (i.e.,

you purchased it with cash or through

nancing but you are neither leasing

nor are in an arrangement to purchase

electricity generated by a system you

do not own).

• The solar PV system is new or being

used for the rst time. The credit

can only be claimed on the “original

installation” of the solar equipment.

What expenses are included?

The following expenses are included:

• Solar PV panels or PV cells used

to power an attic fan (but not the

fan itself)

• Contractor labor costs for onsite

preparation, assembly, or original

installation, including permitting fees,

inspection costs, and developer fees

• Balance-of-system equipment,

including wiring, inverters, and

mounting equipment

Photo credit Dennis Schroeder, NREL

The U.S. Department of Energy

Solar Energy Technologies

Ofce supports early-stage

research and development

to improve the affordability,

reliability, and performance of

solar technologies on the grid.

The ofce invests in innovative

research efforts that securely

integrate more solar energy into

the grid, enhance the use and

storage of solar energy, and lower

solar electricity costs.

• Energy storage devices that are

charged exclusively by the associated

solar PV panels, even if the storage is

placed in service in a subsequent tax

year to when the solar energy system

is installed (however, the energy

storage devices are still subject to the

installation date requirements)

• Sales taxes on eligible expenses.

How do other incentives

I receive affect the federal

tax credit?

For current information on incentives,

including incentive-specic contact

information, visit the Database of State

Incentives for Renewables and Efciency

website at www.dsireusa.org.

Rebate from My Electric Utility to

Install Solar

Under most circumstances, subsidies

provided by your utility to you to install

a solar PV system are excluded from

income taxes through an exemption

in federal law.

When this is the case,

the utility rebate for installing solar

is subtracted from your system costs

before you calculate your tax credit. For

example, if your solar PV system was

installed before December 31, 2022,

cost $18,000, and your utility gave you a

one-time rebate of $1,000 for installing

the system, your tax credit would be

calculated as follows:

0.26 * ($18,000 - $1,000) = $4,420

Payment for Renewable Energy

Certicates

When your utility, or other buyer, gives

you cash or an incentive in exchange for

renewable energy certicates or other

environmental attributes of the electricity

generated (either upfront or over time),

the payment likely will be considered

taxable income.

If that is the case, the

payment will increase your gross income,

but it will not reduce the federal solar

tax credit.

Rebate from My State Government

Unlike utility rebates, rebates from state

governments generally do not reduce

your federal tax credit. For example,

if your solar PV system was installed

before December 31, 2022, installation

costs totaled $18,000, and your state

government gave you a one-time rebate

of $1,000 for installing the system, your

federal tax credit would be calculated

as follows:

0.26 * $18,000 = $4,680

State Tax Credit

State tax credits for installing solar

PV generally do not reduce federal tax

credits—and vice versa. However, when

you receive a state tax credit, the taxable

income you report on your federal taxes

will be higher than it otherwise would

have been because you now have less

state income tax to deduct.

The end

result of claiming a state tax credit is

that the amount of the state tax credit is

effectively taxed at the federal tax level.

For example, the net percentage reduction

for a homeowner in New York who

claims both the 25% state tax credit

and

the 26% federal tax credit for an $18,000

system is calculated as follows, assuming

a federal income tax rate of 22%:

0.26 + (1 – 0.22) * (0.25) = 45.5%

Note that because reducing state income

taxes increases federal income taxes paid,

the two tax credits are not additive (i.e.,

not 25% + 26% = 51%). For an $18,000

system, the total cost reduction in this

example would be:

[$18,000 * 0.26] + [$18,000 * (1 –

0.22) * (0.25)]

= $4,680 + $3,510

= $8,190

Can I claim the credit,

assuming I meet all

requirements, if …

…I am not a homeowner?

Yes. You do not necessarily have to be

a homeowner to claim the tax credit.

A tenant-stockholder at a cooperative

housing corporation and members of

condominiums are still eligible for the

tax credit if they contribute to the costs of

an eligible solar PV system. In this case,

the amount you spend contributing to the

cost of the solar PV system would be the

amount you would use to calculate your

tax credit. However, you cannot claim

a tax credit if you are a renter and your

landlord installs a solar system, since you

must be an owner of the system to claim

the tax credit.

…I installed solar PV on my

vacation home in the United

States?

Yes. Solar PV systems do not necessarily

have to be installed on your primary

Solar PV system on a home in the Ozark Mountains.

Photo credit Douglas Hutchings.

residence for you to claim the tax credit.

However, the residential federal solar tax

credit cannot be claimed when you put a

solar PV system on a rental unit you own,

though it may be eligible for the business

ITC under IRC Section 48.

…I am not connected to the electric

grid?

Yes. A solar PV system does not

necessarily have to be connected to

the electric grid for you to claim the

residential federal solar tax credit, as long

as it is generating electricity for use at

your residence.

…the solar PV panels are on my

property but not on my roof?

Yes. The solar PV panels located on

your property do not necessarily have

to be installed on your roof, as long as

they generate electricity for use at your

residence.

…I have a home ofce (or my

residence is also used for a

commercial purpose)?

Yes, but if the residence where you

install a solar PV system serves multiple

purposes (e.g., you have a home ofce

or your business is located in the same

building), claiming the tax credit

can be more complicated. When the

amount spent on the solar PV system is

mostly used for residential rather than

business purposes, the residential credit

may be claimed in full without added

complications. However, if less than

80% of the solar PV system cost is a

residential expense, only the percentage

that is residential spending can be used

to calculate the federal solar tax credit

for the individual’s tax return; the portion

that is a business expense could be

eligible for a similar commercial ITC on

the business’s tax return.

…I nanced my solar PV system

instead of paying for it upfront?

(If so, how do I treat interest,

origination fees, and extended

warranty expenses?)

Yes. If you nanced the system through

the seller of the system and you are

contractually obligated to pay the full

cost of the system, you can claim the

federal solar tax credit based on the

full cost of the system. Miscellaneous

expenses, including interest owed on

nancing, origination fees, and extended

warranty expenses are not eligible

expenses when calculating your tax

credit.

…I bought solar panels but have

not installed them yet?

No. The tax credit is only for systems that

were “placed in service” during the year,

meaning they are installed and producing

electricity for the homeowner.

…I participate in an off-site

community solar program?

The answer depends heavily on your

specic circumstances. The IRS states

in Questions 25 and 26 in its Q&A on

Tax Credits

that off-site solar panels

or solar panels that are not directly on

the taxpayer’s home could still qualify

for the residential federal solar tax credit

under some circumstances. However,

community solar programs can be

structured in various ways, and even if

you are eligible for the tax credit, it may

be difcult to claim due to other tax rules.

For example, one arrangement is the

creation of a “special purpose entity,”

where community members form

and invest in a business that operates

the community solar project. If your

participation is limited to investing in the

community solar project and you do not

participate in the operation of the project

on a regular, continuous, and substantial

basis, you are constrained in taking

advantage of the credit because you are

considered a “passive investor.” IRS rules

require that a tax credit associated with a

passive investment only be used against

passive income tax liability, which only

applies to income generated from either a

rental activity or a business in which the

individual does not materially participate.

Many homeowners will therefore not

have passive income against which the

credit can be claimed.

Other Frequently Asked

Questions

If the tax credit exceeds my tax

liability, will I get a refund?

This is a nonrefundable tax credit, which

means you will not get a tax refund for

the amount of the tax credit that exceeds

your tax liability.

However, you can

carry over any unused amount of tax

credit to the next tax year.

Can I use the tax credit against the

alternative minimum tax?

Yes. The tax credit can be used against

either the federal income tax or the

alternative minimum tax.

I bought a new house that was

constructed in 2020 but I did not

move in until 2021. May I claim a

tax credit if it came with solar PV

already installed?

Yes. Generally, you can claim a tax credit

on the expenses related to the new solar

PV system that already came installed

on the house for the year in which you

moved into the house (assuming the

builder did not claim the tax credit)—in

other words, you may claim the credit

in 2021. For example, you can ask the

builder to make a reasonable allocation

for these costs for purposes of calculating

your tax credit.

How do I claim the federal

solar tax credit?

After seeking professional tax advice and

ensuring you are eligible for the credit,

you can complete and attach IRS Form

5695

to your federal tax return (Form

1040 or Form 1040NR). Instructions

on lling out the form are available at

http://www.irs.gov/pub/irs-pdf/i5695.pdf

(“Instructions for Form 5695,” IRS).

Where can I nd more information?

Ask Questions

Internal Revenue Service (IRS), 1111 Constitution Avenue,

N.W., Washington, D.C. 20224, (800)829-1040.

Find Resources

• The federal statute and IRS guidance: 26 USC § 25D at www.

gpo.gov and “Q&A on Tax Credits for Sections 25C and 25D”

at www.irs.gov.

• Updated information on the current status of the ITC:

Database of State Incentives for Renewables and Efciency

entry on “Residential Renewable Energy Tax Credit”

at www.dsireusa.org.

Endnotes

The federal tax credit is sometimes referred to as an Investment Tax Credit, or ITC,

though is different from the ITC offered to businesses that own solar systems.

26 U.S.C. § 25D, https://www.govinfo.gov/app/details/USCODE-2011-title26/USCODE-

2011-title26-subtitleA-chap1-subchapA-partIV-subpartA-sec25D.

IRS. 2018, March 2. IRS private letter ruling 201809003. https://www.irs.gov/pub/

irs-wd/201809003.pdf. Note: A private letter ruling may not be relied on as precedent by

other taxpayers.

Systems installed before December 31, 2019 were eligible for a 30% tax credit.

The IRS has permitted a taxpayer to claim a section 25D tax credit for purchase of a

portion of a community solar project (IRS. 2015, September 4. IRS private letter ruling

201536017. https://www.irs.gov/pub/irs-wd/201536017.pdf. Note: A private letter ruling

may not be relied on as precedent by other taxpayers.)

Isaac L. Maron. 2018, March 26. “Residential Solar Storage is Eligible for Tax Credit,

Subject to a 100% Cliff.” Tax Equity Times. https://www.taxequitytimes.com/2018/03/

residential-solar-storage-eligible-tax-credit-subject-100-cliff/. Note: A private letter

ruling may not be relied on as precedent by other taxpayers.

26 U.S.C. § 136, https://www.govinfo.gov/app/details/USCODE-2011-title26/USCODE-

2011-title26-subtitleA-chap1-subchapB-partIII-sec136.

IRS. 2010, September 3. IRS private letter ruling 201035003. http://www.irs.gov/pub/

irs-wd/1035003.pdf. Note: A private letter ruling may not be relied on as precedent by

other taxpayers.

The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on state and local tax

deduction, which may impact whether a state tax credit impacts federal taxable income.

New York’s 25% state tax credit is capped at $5,000 for solar energy systems,

regardless of cost, according to DSIRE (https://programs.dsireusa.org/system/program/

detail/80).

See 26 U.S.C. § 25D(d)(2), which species that eligible solar electric property

expenditures must be “for use at a dwelling unit located in the United States and used as a

residence by the taxpayer” (emphasis added).

IRS. “Instructions for Form 5695.” https://www.irs.gov/instructions/i5695.

IRS. “Q&A on Tax Credits for Sections 25C and 25D.” Notice 2013-70. https://www.irs.

gov/pub/irs-drop/n-13-70.pdf.

Jason Coughlin, Jennifer Grove, Linda Irvine, Janet F. Jacobs, Sarah Johnson Phillips,

Leslie Moynihan, and Joseph Wiedman. 2010, November. A Guide to Community

Solar: Utility, Private, and Non-Prot Project Development. http://www.nrel.gov/docs/

fy12osti/54570.pdf.

Homeowners may get a tax refund at the end of the year due to the tax credit, if the

reduction in tax liability means there was overpayment during the year. This can often

occur when employers deduct taxes for employees over the course of the year. However,

such refund is still limited by the taxpayer’s total tax liability.

IRS, “About Form 5695, Residential Energy Credits,” https://www.irs.gov/forms-pubs/

about-form-5695.

A rooftop array perched on a coastal hill on the island of Vinalhaven in Maine.

Photo credit William Byers.

DOE/EE-2315 • January 2021

For more information, visit: energy.gov/eere/solar

SOLAR ENERGY TECHNOLOGIES OFFICE