For years, the Solar Investment Tax Credit (ITC) has been a valuable incentive for individuals and businesses interested in investing in solar energy.
However, with the passing of the Inflation Reduction Act (IRA) in 2022, the federal solar tax credit underwent significant changes.
The new regulations simplified the residential solar credit. However, it is less cut and dry than the previous iteration of the commercial Solar ITC. That’s where this blog comes in.
We’re here to unravel the intricacies and help you understand how to benefit from the tax incentives of investing in solar panels.
At Paradise Energy Solutions, we pride ourselves on being solar energy experts, not tax advisors. To ensure the accuracy and reliability of this content, we collaborated with Randall Weaver, a Certified Public Accountant and Tax Partner at Trout CPA in Lancaster, PA, who has over 18 years of experience in tax planning, preparation, and business consulting.
"The new federal solar tax credit offers valuable incentives for businesses and homeowners," says Randall Weaver, CPA, Partner at Trout CPA. "However, navigating the complexities of these incentives requires careful planning and expert guidance to ensure you maximize your tax savings."
The Inflation Reduction Act (IRA) sets the framework for federal solar tax incentives, offering substantial financial benefits for investing in solar energy.
While the IRA provides tax incentives for all solar installations, the specific benefits vary based on factors such as system size and customer type — whether residential, commercial, or non-profit.
The residential investment tax credit (Section 25D) is a straightforward and beneficial incentive for homeowners looking to invest in solar energy. This tax credit allows homeowners to reduce their tax liability by 30% of the total installation cost. The credit is scheduled to drop to 26% in 2033, 22% in 2034, and 0% in 2035 and thereafter.
One of the great advantages of this tax credit is that homeowners don't have to worry if they can't utilize the entire credit in the first year. They have the advantage of carrying the credit forward until it is fully utilized. It's important to note that the residential tax credit cannot be used to recapture taxes from prior years.
Unlike businesses, homeowners are not eligible for the transferability rule, which allows businesses to transfer (sell) the credit to a third party. The residential tax credit is exclusively available to the homeowner who owns the solar system.
Homeowners are also not entitled to any of the 10% ITC adders, such as installation in low-income areas or for domestic content. On the positive side, the prevailing wage and apprentice standards do not apply.
The residential investment tax credit provides homeowners a substantial financial benefit, allowing them to reclaim significant money that would otherwise be paid to the IRS.
The commercial solar tax credit (Section 48) is more complex than the residential credit, with additional requirements and regulations. However, it also offers the potential for greater savings.
Commercial entities installing a solar system with a capacity of less than 1 MW of AC power are eligible for a base tax credit of 30%. This credit can increase to as much as 70% if the system qualifies for three adders, covering 30-70% of the total installation cost.
Commercial solar installations may qualify for up to three adders if specific conditions are met. While it is unlikely you will qualify for all three, we provide more detailed information on each incentive later in this blog.
The tax credit for solar systems over 1 MW AC power begins at 6% across the board but can increase to 70% if certain conditions are met. This includes the same three adders as smaller commercial systems, in addition to a prevailing wage bonus:
These large systems can also choose a production tax credit (PTC) over the ITC. This credits system owners based on how much electricity the system produces. The current rate is $0.026/kWh but will increase with inflation. Adders for low-income solar installations apply only to solar ITC.
A series of commercial tax credit adders can boost the tax credit amount by 10% each. Commercial systems under and over 1 MW may qualify for these adders, but residential systems will not. Below are the additional requirements commercial systems must meet to qualify for the energy communities adder, domestic content adder, and low-income adder.
This adder seeks to speed up the adoption of renewable energy in key areas of the country. Qualifying systems can add 10% onto their tax credit if their system is located in or on one of the following:
Use this map to determine if you're in an area that qualifies.
To support U.S. manufacturing, commercial solar projects can qualify for an additional 10% Investment Tax Credit (ITC) bonus if they meet domestic content requirements. While the guidelines continue to evolve, recent updates provide more clarity on how businesses can qualify.
Note: these requirements are not yet final and will likely change. We recommend confirming the details of your project with your accountant.
To receive the 10% tax credit bonus, solar projects must meet two key requirements:
What's New in the 2025 Guidance?
The government recently updated the domestic content rules, making a few key changes:
What This Means for Your Project
If a business that is seeking to satisfy the domestic content adder sees project costs increase by more than 25% or if a product is unavailable, they may qualify for a waiver. However, the process of claiming this waiver is undefined at this time.
The tax credit adder for low-income communities seeks to bring more renewable energy to areas that may be underserved, marginalized, or environmentally overburdened. Note that this does not include individual residences; it applies only to multi-family housing. Qualifying projects can receive an additional 10%-20% on their solar investment tax credit if they fall within one of the following four categories:
To qualify, the system must be smaller than 5 MW AC. Low income must be shown through paystubs, taxes, or social assistance programs like SNAP and SSI.
A project may be disqualified if it is placed in service before the adder is granted or if it is not placed in service within four years of the award date. Additionally, disqualification may occur if the system fails to meet the financial benefits requirement or if the system size is reduced by 2kW or 25%, whichever is greater.
The best way to ensure your project qualifies is to consult your tax expert or accountant.
This adder is capped at 1.8 GW of solar each year through 2032, which means availability ceases when the annual allocation is met. No other adder has a cap.
It’s important to note that the commercial solar tax credit includes recapture rules, which may require you to repay a portion of the credit if your solar system is sold, destroyed, or no longer used in a qualifying manner within five years.
The recapture rules for the commercial solar tax credit apply during the first five years after your solar system is placed into service. In the first year, 100% of the credit is subject to recapture if the system no longer qualifies. This percentage decreases by 20% each year, reaching zero after year five. If the system becomes disqualified during this period, you’ll be required to repay the unvested portion of the credit in the year the event occurs.
Recapture can be triggered by several events, such as the system no longer being used as a qualified energy facility, being permanently destroyed without repair or replacement, or undergoing a change in ownership during the recapture period. If any of these events occur, the IRS will reclaim the unvested portion of your solar tax credit, resulting in an increased tax bill for the affected year.
If you have a tax liability, your solar tax credit must be applied to offset your owed taxes in the year your solar panel system is energized. However, there’s good news for those with limited tax liability who can’t use their entire credit in the first year.
For homeowners, the residential solar tax credit can be carried forward indefinitely, allowing you to fully utilize the credit over time.
For businesses, the commercial solar tax credit offers even greater flexibility. Businesses can apply the credit to recover taxes paid in the previous three years and carry the remaining balance forward for up to 22 years, ensuring no portion of the credit goes to waste.
Businesses without tax liability now have the option to transfer (sell) their solar tax credit to a third party. This provision applies to commercial solar systems that are not eligible for direct pay, such as those owned by non-profits, government entities, and similar organizations.
For instance, you could sell your solar tax credit for $0.90 on the dollar. This means you’d receive 90% of the value of the tax credit you wouldn’t otherwise be able to use. Meanwhile, the buyer benefits from a 10% savings on the portion of their taxes covered by your solar credit.
Here’s how the transferability works:
As this program ramps up, brokerages and administrators will likely step in to facilitate the process. Because of the complexities and added costs, it will likely only benefit larger solar systems at present.
Non-profits and state and local governments can use the direct pay option (also known as elective pay) for all or a portion of the solar tax credit. This makes the tax credit available to nearly every entity.
Here's who may qualify
Here are the conditions:
Filing for the direct payment must be completed at the end of the following tax deadline, which is in May of the following year for 501(c) non-profits. Receiving the direct payment could take up to one year or more.
Additionally, the source of funds is important when claiming direct pay. If an “applicable entity” contributes more than 70% of the system’s cost through special funding, the excess will reduce the direct pay amount.
A waiver may be granted if costs increase more than 25% due to the domestic content requirement or if the products are unavailable.
In the past, the ITC was limited to battery backup systems installed within one year of a solar energy system. However, under the IRA, you can now fully benefit from the tax credit when installing a battery system, regardless of whether or when you install solar. This means that you can utilize the federal tax credit even if you installed solar years ago or haven’t installed it at all.
To qualify, energy storage systems must have a capacity of over 3 kWh, and eligibility is also tied to the U.S. Department of Treasury’s energy reduction goal.
The federal solar tax credit can only be claimed by the system owner. For leased systems, this means the lessor, not the lessee. The system owner may also claim the credit even if the system is financed.
The IRS verifies solar tax credit eligibility by assessing whether taxpayers meet specific criteria established under federal law. The solar energy system must be installed at a qualifying property, such as a residential or commercial building, and used to generate electricity.
It is important to note that the taxpayer must own the system to claim the credit; lessees, such as those in lease agreements or power purchase agreements (PPAs), are not eligible. However, if the system is financed, the taxpayer can still claim the credit as long as they retain ownership.
Verification starts with the documentation submitted when claiming the credit. Homeowners must complete and file IRS Form 5695, Residential Energy Credits, along with their tax return. Businesses claim the tax credit using IRS Form 3468. The individual partner/shareholder then files Form 3468 (duplication of what the business filed but is reporting their share), and Form 3800."
These forms require information such as the total cost of the system, the installation date, and any applicable deductions or adjustments, like state rebates or incentives. Supporting documentation, including contracts, invoices, and proof of payment, is crucial to substantiate the claim and should be retained for potential IRS review.
The IRS may also confirm that the installation occurred during the tax year for which the credit is claimed and that the system is located on a property in the United States. Additionally, if taxpayers apply for credits after receiving other incentives, such as state or local grants, these must be deducted from the claimed federal credit or claimed as income.
To prevent fraud, the IRS may audit claims or request further documentation to confirm eligibility. This could include reviewing ownership agreements, installation timelines, and compliance with federal guidelines. Accurate record-keeping and adherence to IRS requirements are critical for taxpayers to successfully claim and retain the solar tax credit. By carefully verifying each claim, the IRS ensures that this tax benefit is used appropriately to promote renewable energy adoption.
The new IRS forms do provide the IRS with more information, especially related to the bonus adders.
The federal solar tax credit is intended to reduce your tax liability, but what if you don’t owe enough taxes to use the entire credit in a single year? Luckily, there are flexible solutions available for both homeowners and businesses to ensure they can maximize the benefit of the credit.
For homeowners, any unused portion of the tax credit does not expire.
Businesses can apply the credit retroactively to recoup taxes paid in the previous three years or carry it forward for up to 22 years until it’s fully utilized.
Additionally, businesses can transfer the credit to a third party. While this typically results in receiving less than 100% of the credit’s value, it can be a practical solution in some situations. However, strict rules must be followed to successfully complete a transfer.
Are you ready to see what a solar investment could do for you? The first step is to speak with one of our local solar consultants. They will answer all your questions and help you investigate what a solar investment would look like for you. Get started here.
If you're not ready to speak with our team, you can use our solar ROI calculator and visit our solar learning center to continue to learn about your solar energy investment.
For tax advice about the solar tax credit, real estate, and more, reach out to Trout CPA at 717-569-2900 or visit https://www.troutcpa.com/contact.