The Tax Credit Program

What Is the Federal Investment Tax Credit?

The Investment Tax Credit (ITC) was first offered via the Energy Policy Act of 2005. Once the cost of solar panels began to drop around 2012 the program began to make financial sense for individual homeowners to switch to solar by decreasing the total cost of their system through tax credits.

Solar adoption has been on a steady increase for almost a decade now pushing the federal government to extend the program multiple times. The first program was set to be more of short-term incentive and expire in 2007, but the federal government has repeatedly extended the policy.

And due to the Federal Inflation Reduction Act this tax credit has been extended and strengthened. This year if you switch to solar you can claim 30% of the total cost of your solar project against your tax liability.

How Does The Solar Tax Credit Work?

Again, Lumio is not offering tax advice or advising customers about taxes. The information here is intended for educational purposes only. Like anything involving taxes, it can be complicated, but for this article we’ll keep it simple.

The bottom line is this: when you install a solar power system this year, 30% of your total project costs (including equipment, permitting, batteries, roof improvements, installation, etc) can be claimed as a credit on your federal tax return for that year.

A tax credit is a dollar-for-dollar reduction of the income tax you owe. Every dollar decreases your tax liability by a dollar. It’s that simple. If you spend $50,000 on your system, you would be eligible for about a $13,000 credit when you file your taxes.

It’s important to note that tax credits come in two varieties: refundable tax credits and non-refundable tax credits. The Investment Tax Credit is a non-refundable tax credit—meaning if you owe taxes at the end of the year then you can decrease your tax liability by the amount of your solar credit, but if you don’t owe Uncle Sam any money it may be harder to take full advantage of the program.

Is A Solar Lease Eligible For Tax Credit?

As of April 2022, the Solar Investment Tax Credit (ITC) is worth 30% of your total system cost, including the value of parts and contractor fees for the installation for any purchased system.

You are only allowed to claim the credit if you own your system. A solar lease, unfortunately, does not qualify as an eligible purchase. With a power purchase agreement (PPA), the solar company leases you the system but they own the equipment. Learn more about PPAs here.

It’s important to weigh all the different financing options when deciding to switch to solar. Leasing is great because it typically involves much less money out of pocket up-front, and you get to enjoy clean energy pretty easily. If taking advantage of the solar tax credit is important to you then it might make the most sense to lock in a low rate solar specific loan and snag that tax credit while you can.

Am I Eligible?

If you purchased a solar system before the end of the year, and owe federal taxes, you should be eligible for the tax credit--but it is always good to chat with your local friendly tax advisor for specific recommendations and info. 

How do I claim the Investment Tax Credit and what does it cover?

If you are eligible to claim the ITC on your taxes, your next question will be: what do I need to do to actually get the credit on the taxes I owe? And how will I get paid?

If you are starting down the DIY path to make the switch to solar, our first bit of advice is to keep all your receipts from the start of your solar installation project that your tax professional will use. Like any tax incentive, the Federal Solar Tax Credit requires a paper trail. The more you spend on your project, the larger your credit—so make sure to keep track of everything!

One of the sweet benefits of letting us at Lumio help you through this process is we’ll track each penny of this adventure for you. No lost receipts or forensic accounting mess to work through. We’ve got every step of this covered.

Here are some of the more common expenses that you are allowed to claim as part of the ITC:

• Solar equipment
• Freight shipping costs
• Solar consulting fees
• Professional installation costs
• Electrician fees
• Engineer fees
• Tools bought or rented
• Wiring, screws, bolts, nails, etc.
• Equipment purchased or rented (scaffolding or a man-lift, for example)
• Permitting fees
• Permitting service costs
• Required electrical upgrades
• Necessary roofing improvements

Costs will vary depending on a thousand different variables. The good news is that hiring a professional company that does tens of thousands of these a year, like Lumio, is an expense that can be claimed.

You can also choose to install the system yourself. Although you can’t claim your own labor as an expense for the credit, you can claim other costs incurred.

How to File Form 5695 with Your 1040 Individual Tax Return

If you choose the road less traveled and install your own system, to claim the credit you’ll need to prove to the government where every penny went. For that, you need to follow the guidance of your tax professional and fill out IRS form 5695 with form 1040 to claim the ITC.

Again, we aren’t tax professionals, but we sure do make this part easy on you when you partner with us on this journey.

Learn More

Tax credits are a great way to offset a large portion of the cost of your residential solar system. Now is the time to take that first step. Let us show you the easy way to make your own personal power.