By: Stephanie Burke & Chris Fuksman
According to the Department of Energy's SETO (Solar Energy Technologies Office), provisions included in the Inflation Reduction Act of 2022 will reduce the cost of installing rooftop solar by an average of $7,500, with taxpayers expected to realize an additional average savings of $9,000 on their electricity bills over the system's life[1].
The section of the Inflation Reduction Act related to solar energy is commonly known as the Investment Tax Credit (ITC). The expanded ITC has investors considering if now is the right time to install solar panels in their homes. This article answers some common questions for those considering solar energy investments.
What Solar Tax Credits and Incentives Do I Qualify for?
Federal Tax Credits for Solar Installation
There are two federal tax credits for solar installations – Section 48 ITC for businesses and Section 25D residential credit for individuals. The residential credit can be claimed on 30% of the overall system cost, and there is no dollar maximum on the amount claimed. The 30% credit amount is valid through 12/31/32 and must be applied in the same tax year as system installation. The credit cannot exceed the overall tax liability for the year but can be carried forward to future years as needed.
New Jersey’s Clean Energy Program
New Jersey's Clean Energy Program no longer offers upfront rebates for solar projects. Incentives are provided through Solar Renewable Energy Certificates (SRECs). Residents can register to earn SRECs through the Successor Solar Incentive (SuSI) Program, the current program for New Jersey residents. In addition to the SuSI Program incentives, New Jersey offers a full exemption from state sales tax for all solar energy equipment. The renewable energy system can be exempted from local property taxes by filing a Form CRES.
What costs does the Federal SOLAR Tax credit cover?
The following items are includible expenses when calculating the tax credit amount:
Labor costs
Permits & inspection fees
Balance of system equipment (wiring, inverters, mounting equipment)
Energy storage devices (3 kWh or more capacity rating)
Sales tax
Solar panel costs
The panels are typically the most expensive part of any project and can be purchased outright, financed, or leased. The cost of panels purchased outright is eligible for the tax credit. If financed, the homeowner can claim the credit on the cost of panels but cannot include any financing or loan origination fees in their overall project cost. If the panels are leased, the homeowner may not consider the panel cost when calculating total expenses eligible for the residential (Section 25D) tax credit. In this situation, the solar energy company will take the business (Section 48) credit, and the homeowner can recover the savings through the leasing agreement.
If your electric utility provides a subsidy or rebate, this amount must be subtracted from overall system costs before calculating the federal tax credit. This is not the same as payment for excess energy generated by the system, such as SRECs, which may be included in taxable income.
If your state provides a rebate, this amount is generally not excluded from overall system costs before calculating the federal tax credit.
What Kinds of Property Qualify?
The tax credits apply for primary residences and specific improvements to second homes. The credits are generally unavailable for rental property, although a landlord may be considered eligible for the business credit.
For a mixed business/residential use building, the full tax credit can be applied as long as 80% of the solar PV system cost is considered residential. If the percentage is less than 80%, the tax credit may be able to be claimed as partial residential (Section 25D) and partial business (Section 48).
When the home is sold, ownership of the solar energy system and any SRECs generated typically transfer to the new property owner.
Where can I go for more information?
Visit the links below for more detailed information:
SETO: Homeowner's Guide to Federal Tax Credit
IRS: Residential Clean Energy Credit
As a final note, there can be misinformation about certain solar energy incentives. It's best practice to use verified resources like those listed above when researching and pricing options. Contact your advisor if you'd like assistance with reviewing proposals.
This article is part of a multi-part series on sustainability, eco-friendly initiatives, and associated incentives. Look out for more information in the coming weeks.
[1] Source: Department of Energy: unlock an additional average savings of $9,000