Can You Claim the Solar Tax Credit When Financing Your System?
Learn how financing your solar system impacts eligibility for the federal tax credit and what to consider when claiming it on your tax return.
Switching to solar energy is a major investment, but the federal solar tax credit helps offset costs by allowing homeowners to deduct a portion of their system expenses from federal taxes. This incentive makes solar power more affordable and accessible.
Eligibility Criteria for the Credit
To qualify, the solar system must be installed on a property you own, whether it’s a primary or secondary residence. Rental properties do not qualify unless the home is also used personally. The system must be new—used panels do not meet the requirements.
The installation must be completed within the tax year for which the credit is claimed. If the system is not operational by December 31, it cannot be claimed until the following year. The credit covers the cost of panels, inverters, wiring, labor, and permitting fees but excludes unrelated home improvements.
Ownership is essential. If you lease the panels, you are not eligible because the leasing company retains ownership and claims the incentive. Only those who purchase their system outright or through a loan that maintains ownership can claim the credit.
Financing Arrangements
How the system is financed affects eligibility. Purchasing outright allows you to claim the full credit, while loans that transfer ownership immediately—such as home equity or unsecured personal loans—do not impact eligibility. Since you own the system from the start, the credit applies to the total system cost.
Some solar loans include dealer fees, often part of zero-down financing offers, which do not qualify. For example, if a system costs $30,000 with a $3,000 dealer fee, only the $30,000 is eligible. Interest paid over time is also excluded, as the credit applies only to the principal cost and installation expenses.
Power purchase agreements (PPAs) and leases do not grant ownership, so homeowners using these options cannot claim the credit. The third-party provider retains ownership and benefits instead.
Calculation of the Credit
The federal solar tax credit is 30% of eligible costs for systems installed in 2024. This percentage applies to the total cost before any state or local incentives are deducted. However, rebates that directly lower the purchase price, such as utility discounts, must be subtracted before calculating the credit.
For example, if a system costs $25,000 and a $1,000 utility rebate is applied, the credit is based on $24,000, resulting in a $7,200 tax credit. State tax credits do not affect this calculation. If a homeowner receives a $5,000 state credit, they can still claim 30% of the full $25,000 system cost on their federal return.
Applying It on Tax Returns
To claim the credit, homeowners must file IRS Form 5695, which calculates the credit before transferring it to Schedule 3 (Form 1040) to reduce tax liability. This is a non-refundable credit, meaning it can lower tax owed to zero but does not generate a refund beyond what was paid. If the credit exceeds tax liability, the unused portion can be carried forward to future years.
Proper documentation is essential. Receipts, invoices, and manufacturer certifications should be kept to confirm the system meets IRS requirements. If audited, the IRS may request proof of installation, such as permits or interconnection agreements. Homeowners with financed systems should ensure loan agreements establish ownership, as improper financing structures could lead to disqualification.