CA State Solar Tax Credit: What’s Available?

While California no longer offers a state-specific solar income tax credit, residents can access financial incentives to reduce the cost of installing a solar energy system. The primary incentive is a federal tax credit that directly lowers your federal income tax liability. The state also provides other programs, including a property tax benefit, specific rebate programs, and utility billing arrangements that lower the overall cost of a solar investment.

The Federal Solar Investment Tax Credit

The primary incentive for homeowners installing solar is the federal Residential Clean Energy Credit, often referred to as the Solar Investment Tax Credit (ITC). This is a dollar-for-dollar credit that directly reduces the amount of federal income tax you owe. The Inflation Reduction Act of 2022 extended and enhanced this credit, setting it at 30% of the total system cost for installations between 2022 and 2032. A homeowner who spends $25,000 on a new solar system can claim a full $7,500 credit.

To qualify, you must own the system, as leased systems are not eligible. The credit is available for installations on your primary or secondary residence. Qualifying expenses include the cost of solar panels, inverters, labor for onsite preparation and assembly, and sales taxes paid on these eligible expenses.

An update to the ITC is the inclusion of battery storage systems with a capacity of 3 kilowatt-hours or more. Previously, batteries were only eligible if charged exclusively by solar, but they now qualify for the 30% credit even when charged from the grid. If your tax credit is larger than your tax liability for a given year, the unused portion of the credit can be carried forward to reduce taxes in future years.

California’s Solar Property Tax Exclusion

California provides an incentive by excluding the value of a new solar energy system from your property tax assessment. Normally, a home improvement that increases your property’s value would trigger a reassessment, leading to a higher annual property tax bill. This exclusion prevents that from happening when you install a solar system.

This tax benefit is codified in Section 73 of the state’s revenue and taxation code. For example, if a new solar installation adds $20,000 to your home’s value and your local property tax rate is 1.1%, you would avoid approximately $220 in additional property taxes each year. This provides a consistent financial benefit for the duration of the exclusion.

The current exclusion was scheduled to expire but has been extended. Homeowners should be aware that this program has a sunset date and may require legislative action to be renewed.

State Rebates and Utility Programs

Self-Generation Incentive Program

Beyond tax-based incentives, California administers the Self-Generation Incentive Program (SGIP). This is a rebate program that provides cash back for installing energy storage systems, commonly known as batteries. The program is structured to encourage pairing batteries with solar installations, as solar panels alone are not the primary focus for most residential customers.

Rebate amounts vary based on the size of the battery system and are subject to declining steps as more capacity is installed statewide. The incentive is often highest for low-income households or those in areas with a high risk of power shutoffs. Your solar installer handles the SGIP application process on your behalf.

Net Energy Metering

Net Energy Metering (NEM) is a utility billing program and a component of solar economics in California. It allows homeowners to receive a bill credit for any excess electricity their solar panels generate and send to the utility grid. This credit can then be used to offset the cost of electricity drawn from the grid at other times, such as at night.

The current program, known as NEM 3.0, has shifted the structure of these credits. Compared to the previous NEM 2.0, the export rates for excess solar energy are lower and are based on “avoided cost” calculations, which vary by the hour, day, and month. This change places a greater emphasis on homeowners using their own solar power directly or storing it in a battery for later use.

How to Claim Available Incentives

The process for claiming these benefits varies by program. To claim the federal Residential Clean Energy Credit, you or your tax preparer will file IRS Form 5695, Residential Energy Credits, with your annual Form 1040 tax return. You must have complete documentation of all eligible project costs, including invoices for equipment and labor, to complete the form accurately. The form calculates the total credit based on your solar and other qualifying expenditures, like battery storage.

For the state-level property tax benefit, the process is handled at the county level and is typically automatic for existing homes. The county assessor’s office is notified through the building permit process for the installation. The exclusion is then granted without homeowners needing to file a specific form.

For programs like the Self-Generation Incentive Program (SGIP) and Net Energy Metering (NEM), the process is managed by your solar installation company. They handle the necessary applications and interconnection agreements with the utility as an integrated part of their service, ensuring you are properly enrolled.