Extended & Increased: A Breakdown of the Latest Changes to Solar Energy Tax Credits

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In 2022, the Inflation Reduction Act updated a federal solar energy tax credit, but it was set to expire in 2023. This solar energy tax credit was recently increased with a new plan to be phased out over the next 10 years.

What Is the Federal Solar Tax Credit?

The federal solar energy credit is an investment tax credit (ITC) enacted in 2006 that can be claimed on federal income taxes by individuals or corporations. The amount of credit is a percentage of the cost of installing a solar panel energy system.

What Are the Changes to the Solar Tax Credit?

For Homeowners

Extended through 2034

Previously set to expire in 2023, the solar tax credit for homeowners has been extended and is now set to be phased out by 2035.

Increased to 30%

In addition to the extension, the credit has also been increased from 22% to 30% for systems installed between 2022 and 2032. However, in 2033, the credit is planned to be reduced to 26%, then 22% in 2034, and phased out completely in 2035.

What It Means for Homeowners

This means that you may be able to deduct 30% of the cost of a new or recently installed solar panel system, as long as it was installed between 2022–20233, from your federal taxes, reducing your overall investment. It also means that if you haven’t purchased a solar panel system yet, this may be a tax credit opportunity worth considering while tax planning for the coming years.

For Businesses

ITC Extended through 2035

Similarly to homeowners, the investment tax credit (ITC) has been extended with a set phase-out plan, but the official phase-out date for businesses is 2036 rather than 2035.

Increased to 30%

The credit was also increased to 30% through 2033 for businesses, but it has a different phase-out schedule. Businesses will see the credit reduced to 22.5% in 2034, 15% in 2035, and it will be fully phased out in 2036.

*Important Note

In addition to ITC credits, businesses also have the alternative option of taking a Production Tax Credit (PTC), which is a per kilowatt-hour (kWh) tax credit for electricity generated by solar technologies for the first 10 years of a system’s operation. Businesses can take either the ITC or PTC, but not both.

What it Means for Business Owners

It means that business owners can deduct up to 30% ITC on systems that were installed in or after 2022 and begin construction before 2033, or a 2.75¢/kWh PTC if they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW) in size.

What Does the Credit Cover?

If you are a business or homeowner that installed a solar panel system in or after 2022—and begin construction before 2033—you are eligible to claim a federal tax credit that covers up to 30% of the following: 

• Solar panels cost

• Solar equipment costs

• Labor costs for solar panel installation

• Solar power storage equipment costs like solar batteries. Storage devices must have a capacity rating of at least 3 kilowatt-hours (kWh)

• Sales taxes paid for eligible solar installation expenses (though some states waive sales tax on system equipment)

Questions

Have questions about the Federal Solar Tax Credit or if it’s a good tax opportunity for you? Our team of tax experts are here to help. Contact us.