The Inflation Reduction Act signed into law by President Biden on August 16, 2022, gives new life to the federal tax credit for the purchase and installation costs of residential solar-power systems and provides guidelines allowing batteries to also qualify for the credit.
The solar credit is a percentage of the cost of a solar electric system installed on a taxpayer's first or second residence located in the U.S. Before the passage of the Inflation Reduction Act the solar credit was being phased out by slowly reducing the credit percentage from 30% to 22% over several years, and the credit was scheduled to end after 2023. The Inflation Reduction Act extends the credit through 2032 at 30% before phasing it out in the years 2033 and 2034.
Those who qualify for the credit in 2022 will receive a bonus, as the credit for 2022 was 26% under the prior law phase-out, but the legislation has returned the credit to 30% for 2022. The following table summarizes the credit for the past and the future years under this new legislation.
Batteries – Emergency power outages imposed by utilities in fire-prone areas during periods of high winds and low humidity, as well as in other disaster areas, can be a major inconvenience, especially for those that work from home, resulting in many taxpayers asking if storage batteries added to a solar installation would qualify for the credit.
Before this law change, the tax code was silent on whether storage batteries were eligible for the credit, although the IRS had issued a private ruling indicating that they would be allowed. The Inflation Reduction Act of 2022 amended the code by adding and defining the term "qualified battery storage technology expenditure." Thus clarifying that for expenditures made after December 31, 2022, battery storage technology that meets the following requirements will qualify for the credit:
(A) It is installed in connection with a dwelling unit in the United States that is used as a residence by the taxpayer, and
(B) It has a capacity of not less than 3-kilowatt hours.
Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery.
Is a Solar System Appropriate For Your Circumstances? - Those TV adds tout how little your electric bill will be after you have a solar system installed. But they fail to consider the cost of the system itself and subsequent system maintenance. When you are deciding whether to acquire a home solar system, you need to factor in the cost of the system (and the interest you will be paying if you are financing it) as compared to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system worth the cost? Electricity costs can vary significantly according to locale.
Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages; you may simply want to go green or go off the grid where electric service is not reliable.
If you plan to go ahead with a solar installation, here are some of the issues you need to be aware of.
Non-Refundable Credit - The credit is nonrefundable, meaning it can only reduce your tax liability to zero. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year.
Maximum Credit – There is no specific maximum, however, and since it is not a refundable credit, the benefit may be spread over several years, and if not utilized by the time the credit is phased out, you may not get the benefit of the entire credit.
Example: Suppose in 2022, your solar installation costs $25,000 and the installation was completed in 2022. That would qualify you for a solar tax credit of $7,500 ($25,000 x 30%). But suppose the income tax liability on your 2022 tax return is only $3,000. Then, the credit would reduce your tax liability to zero, and the other $4,500 ($7,500–$3,000) of the credit is carried over to your 2023 tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or the credit expires. So if you are expecting the credit to offset your outlay for the cost in the first year you may be in for a surprise.
Qualifying Property – Both a taxpayer’s main and secondary residence qualify for this credit.
Who Gets the Credit? – It may come as a surprise, but you need not own the residence where the solar property is installed to qualify for the credit; you need only be a “resident” of the home. The tax code does not specify that an individual must own the home, only that it is their residence.
Example: A son lives with his mother, who owns the home. The son pays to have the solar system installed; the son is the one who qualifies for the credit.
When is the Credit Available? – The credit may be claimed on the tax return of the year during which the installation is completed.
Example: If you purchase and pay for a system installation that is completed in 2022, the credit will be claimed on your 2022 return. However, if you pay for the installation in 2022 and the installation is not completed until 2023, then the credit is claimed on your 2023 return.
Multiple Installations – The credit is available for multiple installations. For instance, after the initial installation, if you add additional solar panels to increase capacity, these would be treated as original installations and qualify for credit at the credit rate applicable for the year the additional installation was completed. On the other hand, if you had to replace damaged panels or perform other maintenance on the system, these costs would not be for an original system and would not qualify for the credit.
Installation Costs – Amounts paid for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit—or piping or wiring connecting the property to the residence—are expenditures that qualify for the credit. This includes expenditures relating to a solar system installed on a roof or ground-mounted installations.
Basis Adjustment – For a home, the term "basis“ generally refers to the cost of the home plus improvements and is the amount subtracted from the sales price to determine the gain or loss when the home is sold. The cost of a solar system adds to a home’s basis, but because the solar credit is a tax benefit, the credit reduces the basis. This will generally create a different basis for federal and state purposes where a state does not provide a solar credit, or it differs from the federal solar credit amount.
Association or Cooperative Costs – If you are a member of a condominium association for a condominium you own or are a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any qualifying solar system costs incurred by the condo, cooperative association, or corporation.
Mixed-Use Property – In cases in which you use a portion of your residence for deductible business or rent part of your home to others, the expenses must be prorated, and only your portion of the qualified solar costs can be used to compute the credit. There is an exception if 20% or less of the property is used for business purposes, in which case the full amount of the expenditure is eligible for the credit.
Newly Constructed Homes – If you are planning on purchasing a newly constructed home that includes a solar system, you may be entitled to claim the solar credit. However, to do so, the costs of the solar system must be stated separately from the home construction costs and the appropriate certification documents must be available.
Utility Subsidy – Some public utilities provide a nontaxable subsidy (rebate) for the purchase or installation of energy-conservation property. In that case, the cost of the solar system eligible for the credit must be reduced by the amount of the nontaxable subsidy that was received, so only your net cost is eligible for the credit.
Leased Installations – When a solar installation is leased, the lessor gets the credit, not the home resident.
As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you tax-wise.