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How do I claim the solar tax credit?
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How do I claim the solar tax credit?

15 mins 29 Oct 2020
In 2019, the US residents spent about $35.4 billion on solar PV systems. To recover their budgets, tax savvy Americans claimed the Solar Investment Tax Credit (ITC) the same year and cut it fine: from 2020 on, the ITC value is going to fall each year. Whether you own a residential or commercial solar PV system, you still have time to reduce its cost 26%, and here is how.

Federal Solar Tax Credit 2020

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 its tremendous success, the ITC value started decreasing dramatically in 2020. By 2022, owners of commercial solar energy systems will be able to deduct only 10% of the cost of the system from their taxes, while for residential systems the story will be over.
So, as you can see from this discouraging forecast, 2020 is the last chance to get an adequate income tax rebate.

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

How to calculate residential solar PV system cost?

Option 1.
Calculate your daily load manually

Solar PV 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:
  • Solar equipment (solar panels, inverters, optimizers, etc.);
  • Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees;
  • Balance-of-system equipment, including wiring, inverters, and mounting equipment;
  • Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed;
  • Sales taxes on eligible expenses.
There is no maximum amount that can be claimed
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

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 5695.
  3. Add your residential energy credit information to Schedule 3 (Form 1040).

What qualifies for the Solar Tax Credit?

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 solar 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, 2020, and December 31, 2020 (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.

What doesn't qualify for the Solar Tax Credit?

What doesn't qualify for the Solar Tax Credit?

There are some fine points which can make you unable to claim the ITC:
☒ The solar 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, 2020 or after December 31, 2020;
☒ The solar 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 solar 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 solar 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 solar 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

How to fill out IRS Form 5695

Once you've installed your solar PV system, collected all the receipts and confirmed you're eligible for the ITC, it's the time to do some paperwork.
Form 5695 calculates tax credits for a number of qualified residential energy improvements, including solar PV systems. We are going to walk you through the form step by step to show how easy it is to handle.
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 5: With lines 2-4 empty, write the same number you have on line 1.
Line 6: Multiply line 5 by 26% (the value of the solar tax credit for 2020).
Note: this is the 2019 form, that is why the ITC was 30%
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 carryforward 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 26% 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.
Note: the numbers
Once you're done with the credit limit worksheet, go back to form 5695.
Line 14: Enter the result from line 11 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 2021 is $1207,8.

How to fill out Form 1040

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). Filing Form 1040 (or 1040-SR for seniors), you must report, and are subject to taxation on your worldwide income.
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 in 2020. Enter that value into Schedule 3, line 5:
If you aren't a US resident, you'll need to file form 1040NR instead of Form 1040 (or 1040-SR for seniors) to report only your US sourced income. This form doesn't involve any schedules, so add the amount that will be credited on your taxes on line 50 of the form:
Good job! Remember to include Form 5695 when you submit your taxes to the IRS.
If you did energy efficiency improvements to your home in the same year, you may also need to complete page 2 of Form 5695.

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

How to calculate commercial solar PV system cost?

How to calculate commercial solar 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 PV 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 arrestors
  • 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.
There is no maximum amount that can be claimed

Steps to claim the Solar Tax Credit

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

What qualifies for the Solar Tax Credit?

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 solar 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, 2020, and December 31, 2020, 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.

What doesn't qualify for the Solar Tax Credit?

What doesn't qualify for the Solar Tax Credit?

There are some fine points which can make you unable to claim the ITC:
☒ The solar 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 solar 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

How to fill out IRS Form 3468

Form 3468 calculates tax credits for a number of qualified commercial energy improvements, including solar PV systems. Although tax form 2020 hasn't been officially released yet, there's a draft by the IRS to give you an example.
Part III, line 12: Include the information concerning the eligible energy credit project to line 12c (for the year 2020).
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

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.
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