How to claim the Solar Tax Credit in 2023

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.

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

1. Determine if your system qualifies for the ITC.
2. Complete IRS Form 5695.
3. Add your residential energy credit information to Schedule 3 (Form 1040).

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 system is placed in service between January 1, 2021, and December 31, 2021 (there is no bright-line test from the IRS on what constitutes 'placed in service', but the IRS has equated it with completed installation);
☑ The system is new or used for the first time (the credit can only be claimed on the 'original installation' of the solar equipment);
☑ You, as an owner, owe taxes this year.

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

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 system is placed in service before January 1, 2021 or after December 31, 2021;
☒ The PV system is leased (in this case, the leasing company will be eligible for the credit, not you);
☒ You don't owe any taxes this year.

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).

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.

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 2-5: If no other energy improvements have been made, write 0.

Line 6a: With lines 2-5 empty, write the same number you have on line 1.

Line 6b: Multiply line 6b by 26% (the value of the solar tax credit for 2021).

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

Line 12: 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.

Note: the costs and the tax due are random.

Line 14: Enter the result from line 3 of 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 26% 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.

Let's assume the tax liability is lower than the tax credit value:

In this example, the tax liability is the smaller number out of the two, so it goes to line 15. Line 16 shows that the ITC rollovered to 2022 is $1208.

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 project construction started between January 1, 2021, and December 31, 2021, but placed in service before 2024;
☑ 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.

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 project construction started after December 31, 2020;
☒ 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.

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

Part III, line 12: Include the information concerning the eligible energy credit project to line 12c (for the year 2021).

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.

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.