How to claim the Solar Tax Credit

Since the Solar Investment Tax Credit (ITC) was enacted in 2006, the U.S. solar industry has grown by more than 200 times. ITC allows you to deduct 30% of your solar system cost from income taxes. Claiming the incentive may seem tricky but it really is not. In this article we’ll show you how to claim Solar Tax Credit by yourself.

Federal Solar Tax Credit in 2024

The Solar Investment Tax Credit (ITC) is a US incentive created to encourage Americans to go solar. Initially it was designed as a tax credit worth 30% of the total solar installation cost (parts and labor), which basically meant a dollar-for-dollar reduction in the amount of income tax owed by the homeowner.

Despite the tremendous success of the Federal Solar Tax Credit, its value started to decrease in 2019. However, the Climate bill signed in August 2022 brought ITC back to 30% and it now applies to all systems installed from 2022 and beyond. There is no cap for the maximum amount of incentive. The tax credit will remain 30% through 2032. In 2033 it will drop to 26% and decrease to 22% in 2034 before ending.

So, if you already have a PV system installed, follow our instructions and file your solar tax return before Tax Day. If you're only planning to go solar, be quick to do it before the ITC starts falling again.

How to claim the ITC. Part 1: Residential PV systems

The process of claiming ITC for residential systems starts with figuring out the cost of your installation. Let’s learn what does it include.

How to calculate residential PV system cost?

Solar system isn’t only about buying solar panels. It comprises a range of auxiliary equipment and services, which should be taken into account when calculating the total solar system cost. As a residential solar system owner, you can claim the following expenses:

We do recommend that you keep all your receipts from the very beginning of your solar installation project. Like any tax incentive, the Federal Solar Tax Credit requires a paper trail. Don't worry, this paper work won't be in vain: the more solar-related expenses you can prove, the larger your credit will be.

Steps to claim the Solar Tax Credit

There are three major steps you'll need to take:
1. Determine if your system qualifies for the ITC.
2. CompleteIRS Form 5695— tax form for Solar Tax Credit.
3. Add your residential energy credit information to Schedule 3 (Form 1040).

What qualifies for the Solar Tax Credit?

Generally, the majority of solar systems qualify for the solar ITC. Go through the following checklist to see if yours does.
☑ The PV system is located at your primary or secondary residence in the USA, or on a RV or boat accepted by the IRS as your second home;
☑ The system has been purchased outright or with a loan (not leased);
☑ The installation has been completed last year;
☑ The system is new or used for the first time. The credit can only be claimed on the ‘original installation’ of the solar equipment; that’s why the answer to a question “How many times can you claim solar tax credit?” is “one unless you get carryforward credit”;
☑ You, as an owner, owe taxes this year. Technically, you can claim ITC even if you don’t owe taxes but then you won’t get a reduction.

Remember, every individual's tax situation is different. Always check with a tax expert for details.

What doesn't qualify for the Solar Tax Credit?

There are some fine points which can make you unable to claim the ITC:
☒ The PV system is installed in an income property in which you don't maintain your own residence (though it may be eligible for the commercial ITC);
☒ The PV system is leased (in this case, the leasing company will be eligible for the credit, not you);

Getting the Solar Tax Credit can be more complicated if the residence where you install a PV system serves multiple purposes (e.g. you have a home office or your business is located in the same building). In this case, the following rule is applicable:

• if the amount spent on the PV system is mostly used for residential rather than business purposes (more than 80%), the residential credit may be claimed in full;

• if less than 80% of the PV system cost is a residential expense, only the percentage that is residential spending can be used to calculate the ITC for the individual’s tax return (the portion that is a business expense could be eligible for a similar commercial ITC on the business’s tax return).

How to fill out IRS Form 5695 for solar panel tax credit

Once you’ve installed your solar system, collected all the receipts and confirmed you’re eligible for the ITC, it's time to do some paperwork.

Form 5695 calculates tax credits for a number of qualified residential energy improvements, including solar PV systems. This is your main solar credit tax form.

Line 1: Calculate your solar electric property costs. Don’t forget to include auxiliary equipment costs, as well as installation fees. Make sure you can prove all purchases and expenses included in the total costs.

Lines 2-4: If no other energy improvements have been made, write 0.

Line 5a and 5b: Pay attention! Batteries, when paired with a solar panel system are eligible for deduction as well if their capacity equals or exceeds 3 kilowatt-hours. If you have an energy storage in your system, tick the “Yes” box and write down its cost in line 5b.

Line 6a: With lines 2-4 empty, and without an energy storage in lines 5a and 5b, write the same number you have on line 1. Otherwise, add lines 1 through 5b.

Line 6b: Multiply line 6a by 30% (the value of the Solar Tax Credit).

Lines 7-11: If you have no fuel cell property installed, tick 'No' and skip lines 7b-11.

Lines 7-11: If you have no fuel cell property installed, tick ‘No’ and skip lines 7b-11.

Line 12: This line is for carryforward credit. If the deduction that you get is larger than the tax that you owe, you’ll have to fill out this particular line next year in order to use the remainder. Since you have just installed your solar PV system, you carry forward no credits from last year.

Line 13: Put the value from line 6 on line 13.

Before going further, you need to calculate if you are going to have enough tax liability to get the full 30% credit in one year. To do that, complete the Residential Energy Efficient Property Credit Limit Worksheet on page 4 of the Instructions for Form 5695. If you are claiming tax credits for adoption expenses, interest on a mortgage, or buying a plug-in hybrid or electric vehicle, you will need that information here.

Once you’re done with the credit limit worksheet, go back to form 5695.

Line 14: Write down your final tax liability from the credit limit worksheet on line 14 of Form 5695.

Line 15: Review line 13 and line 14, and put the smaller of the two values on line 15.

Line 16: In this example, the tax liability is bigger than the tax credits, so the taxpayer will be able to get the full 30% credit in one year. If this is your case, write 0 on line 16. If the tax liability is smaller than the tax credits, subtract line 15 from line 13, and enter it on line 16. That’s the amount you can claim on next year’s taxes.

How to fill out Form 1040

Now, as you’re done with Form 5695, add your solar tax credit to Form 1040 (for US residents).

There are a number of schedules to this form. Schedule 3 will help you claim the credits you're eligible for.

The value on line 15 is the amount that will be credited on your taxes for 2023. Enter that value into Schedule 3, line 5:

Good job! Remember to include Form 5695 when you submit your taxes to the IRS.

How to claim the ITC. Part 2: Commercial solar systems

How to calculate commercial PV system cost?

The property eligible for the ITC isn’t consigned to solar equipment. As a commercial solar system owner, you can claim the following expenses:

• Solar panels, inverters, racking, balance-of-system equipment, and sales and use taxes on the equipment

• Installation costs and indirect costs

• Step-up transformers, circuit breakers, and surge arresters

• Energy storage devices (if charged by a renewable energy system more than 75% of the time)

Needless to say, all receipts should be collected to prove the expenses incurred.

Steps to claim the Solar Tax Credit

There are three major steps you'll need to take:

1. Determine if your system qualifies for the ITC.

2. Complete IRS Form 3468 — solar tax credit form.

3. Add your commercial energy credit information to Form 3800.

What qualifies for the Solar Tax Credit?

Generally, the majority of commercial solar systems qualify for the ITC. Go through the following checklist to see if yours does.
☑ The PV system is located in the United States or U.S. territories;
☑ The system has been purchased outright or with a loan (not leased);
☑ The system is new (no more than 20% of the eligible value of the PV system can be classified as used equipment);
☑ You are a business subject to U.S. federal income taxes.

A solar project is considered to have commenced construction if:

• At least 5% of final qualifying project costs are incurred. Expenses have to be ‘integral’ to generating electricity, and equipment and services have to be delivered (or delivered within 3.5 months after payment).

• Or, ‘physical work of significant nature’ is commenced on the project site or on project equipment at the factory. Physical work has to be ‘integral’ to the project (preliminary activities on site, such as clearing the site or building a fence or an access road, aren’t ‘integral’).

Remember, every tax situation is different. Always check with a tax expert for details.

What doesn't qualify for the Solar Tax Credit?

There are some fine points which can make you unable to claim the ITC:
☒ The PV system is located outside the United States or in the U.S. territories where you don't pay Federal Income Tax (e.g. most Puerto Ricans and Puerto Rican companies are ineligible);
☒ The PV system is leased (in this case, the leasing company will be eligible for the credit, not you);
☒ The system is used to generate energy for heating a swimming pool;
☒ You are a tax-exempt entity such as a school, municipal utility, government agency, or charity.

How to fill out IRS Form 3468

Form 3468 calculates tax credits for a number of qualified commercial energy improvements, including solar PV systems.

Part III, line 12: Include the information concerning the eligible energy credit project to line 12c.

Part III, line 14: Compute the total credit.

The ITC can be claimed in full for the year in which the solar PV system is placed in service. However, the business claiming the ITC must retain ownership of the system for six subsequent years, otherwise the business will be required to repay a portion of the tax credit. The thing is that the ITC ‘vests’ at a rate of 20% per year over five years, so any ‘unvested’ portion is repaid to the Department of the Treasury if something happens during the five years that would have made the project ineligible for the ITC in the first place. For instance, if the business claims the ITC and then sells the system the following year (after it has only vested 20%) it will have to repay 80% of the amount it claimed from the ITC to the Department of the Treasury.

How to fill out Form 3800

Now, as you're done with Form 3468, add your solar tax credit to Form 3800. The tax credit you calculated in Form 3468 should be transferred to line 4a (Part III) of Form 3800

For more information on claiming the Federal Solar Tax Credit for commercial systems, consult the Instructions for Form 3468.

This article has been updated as of January 2024

Tatiana Ivanova

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With a degree in Linguistics, Tatiana uses her vast experience in technical translation to deliver complicated concepts in simple words. She joined the company in 2020 as a contributing writer to become the person to influence Blog’s development.

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