Can You Claim the Tax Credit if You Lease Solar Panels?

The increasing popularity of solar energy solutions has led many to explore financing options like leasing solar panels, which offers an accessible way to adopt renewable energy without significant upfront costs. However, questions often arise about whether individuals who lease their panels can benefit from tax credits. Understanding tax credit eligibility is crucial for anyone considering this option, especially as legislation and incentives evolve to promote clean energy.

Eligibility Under a Lease Agreement

Tax credit eligibility under a solar panel lease depends on ownership. The federal solar tax credit, known as the Investment Tax Credit (ITC), is designed for those who own their solar systems. As of 2024, the ITC allows homeowners to deduct 26% of the installation cost from their federal taxes. However, in leasing arrangements, the solar company retains ownership of the panels and is therefore eligible to claim the ITC—not the lessee. While some leasing companies may pass on savings to customers through reduced payments, lessees cannot directly claim the tax credit.

Leasing agreements vary, and some providers offer power purchase agreements (PPAs), where homeowners pay for the electricity generated by the panels rather than leasing the equipment. In these cases as well, homeowners do not qualify for the ITC. Prospective lessees should carefully review their contracts and consult a tax professional to understand the financial implications.

Ownership Provisions

Owning solar panels involves a significant upfront investment but provides access to financial incentives, including the ITC. Ownership reduces the payback period and enhances return on investment. Additionally, owners can claim depreciation benefits through the Modified Accelerated Cost Recovery System (MACRS), enabling them to recover installation costs over time while gaining substantial tax savings.

Ownership can also increase property value, as owned solar systems are considered assets that enhance a home’s marketability. Understanding these provisions helps individuals evaluate the long-term benefits of ownership compared to leasing.

Allocation of Credits

For solar panel owners, tax credits like the ITC can be claimed directly on tax returns. As of 2024, the ITC is set at 30% of the total installation cost, reflecting ongoing government efforts to promote renewable energy adoption. Businesses also benefit from the ITC, but the allocation of credits depends on their structure—corporations, partnerships, or LLCs each have unique tax implications. For instance, partnerships may distribute credits among partners based on agreement terms, while corporations use the ITC to offset tax liabilities. Passive activity loss limitations under the tax code may restrict how credits are applied to income.

Community solar projects introduce additional complexity. These arrangements allow multiple participants to share benefits from a single solar installation. Credits and savings are allocated based on ownership shares or subscription terms, requiring careful legal and financial planning to ensure compliance with tax regulations and maximize benefits.

Filing Process

Claiming solar tax credits involves precise documentation and adherence to tax regulations. Taxpayers must gather all relevant paperwork, such as invoices, receipts, and contracts, to substantiate the installation costs. This documentation may be requested by the IRS when processing ITC claims.

To claim the credit, taxpayers should complete IRS Form 5695, “Residential Energy Credits,” which calculates the eligible credit amount. Any unused ITC can typically be carried forward to offset tax liabilities in future years, providing ongoing financial relief for those who cannot fully utilize the credit in the year of installation.

Coordination With State Incentives

State-level incentives significantly influence the financial benefits of adopting solar energy. These programs vary by state and include tax credits, rebates, property tax exemptions, and performance-based incentives. In leasing arrangements, these benefits often go to the system owner—the solar company—rather than the lessee. For example, California’s Self-Generation Incentive Program (SGIP) offers rebates for energy storage systems paired with solar installations, but these rebates are typically claimed by the system owner. Similarly, New York’s NY-Sun Initiative provides incentives that benefit the owner of the solar system, not the lessee.

Some states also offer Solar Renewable Energy Certificates (SRECs), which are tradable credits earned for generating solar energy. In leasing scenarios, the solar company retains ownership of the system and the rights to these certificates, creating a revenue stream for the lessor. While lessees may benefit indirectly if these savings are passed on through lower payments, this depends on the terms of the lease. Prospective lessees should carefully evaluate how state incentives interact with their leasing agreements to understand the full financial picture.