If you’re contemplating going solar, you’re likely aware of the federal solar tax credit. However, you may not know its exact implications for your solar installation, especially given its changing rates in the coming years!
If you need a quick lesson on the solar tax credit basics, watch our quick video explaining the basics. Then, read ahead for Simply Solar’s breakdown of the 2021 solar tax credit changes.
What is the Solar Tax Credit?
The Investment Tax Credit (ITC), or solar tax credit, is a tax credit that rewards solar adopters. You can claim this credit on your federal taxes and receive a credit on the cost of your system, which is deducted from your tax payments. This credit could also show in the refund you receive. The 2020 solar tax credit rate was 26%, but this percentage decreases to 22% in 2021.
How Do You Claim the Tax Credit?
To claim the residential solar tax credit, you must fill out Form 5695, and to claim the commercial solar tax credit, you must fill out Form 3468. These forms have slightly different regulations, so speaking to your accountant or tax preparation specialist when applying for the ITC is encouraged.
What Are the Benefits of the Commercial Solar Tax Credit?
One notable benefit is that on top of the standard tax credit, you also benefit from Modified Accelerated Cost Recovery System (MACRS) depreciation, which allows you to depreciate the solar system over a period of time. Often, this depreciation will save you an additional 20-30% on the cost of your solar system and allow you to deduct 85 percent of your tax basis. Commercial solar systems tend to pay for themselves at a faster rate than residential systems, which is why going solar is a cost-effective investment for almost every business.
What Will Happen to the Solar Tax Credit in 2021?
In 2021, the solar tax credit is set to decrease to 22% for both residential and commercial solar. This means that all solar systems that are operational starting from January 1, 2021 will qualify for a 22% credit instead of the current 26%. There will still be no maximum amount that can be claimed; your claim will depend on your total system size. In 2022, the residential tax credit is slated to expire (unless Congress chooses to renew it), while the tax credit for businesses will drop to 10%.
Can You Claim the Tax Credit More than Once?
You are only able to claim the solar tax credit on equipment once. For example, if you installed a solar system this year, you may qualify for the tax credit at the end of the year. If you receive the credit on your taxes, you will not be able to claim the same tax credit the following year. You can, however, claim a credit on new equipment being added to your existing system, like additional solar panels or a solar battery system.
Can You Still Claim the 26% Credit?
There may still be time to qualify for the 26% credit on operating solar systems. We encourage you to speak to your accountant for full details on your personal taxes.
If you are interested in going solar and taking advantage of the ITC before it drops further or expires altogether, give us a call! Our experienced solar consultants can walk you through everything you need to know about installing a solar system and saving money on energy in your future.
For more answers to frequently asked solar energy questions, visit our FAQ .
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