Can You Roll Over Solar Tax Credit to Future Tax Years?
Learn how the federal solar tax credit rollover works, including eligibility, application, and coordination with other tax benefits for future use.
The federal solar tax credit, officially known as the Investment Tax Credit (ITC), allows homeowners and businesses to deduct a percentage of their solar installation costs from federal taxes. This incentive reduces the upfront expense of going solar. However, not everyone has enough tax liability in a single year to use the full credit.
Rollover Provisions
If the solar tax credit exceeds the taxes owed in the installation year, the unused portion carries forward to future years. This allows taxpayers with lower tax obligations to benefit fully over time. Since the ITC is non-refundable, it cannot generate a refund beyond what is owed, making the rollover essential for full utilization.
This provision is especially useful for individuals with lower taxable income, such as retirees. Under current tax law, there is no limit to how many years the credit can be carried forward, ensuring taxpayers can apply the remaining credit until fully used.
Eligibility Requirements
To qualify, the solar system must be installed on a property owned by the taxpayer, whether a primary residence, secondary home, or business. Rental properties only qualify if the owner personally uses the property part of the year. The system must be new—used or previously installed panels are ineligible.
Only those who purchase their solar system outright, either with cash or financing, can claim the credit. Leasing or entering into a power purchase agreement (PPA) disqualifies the taxpayer, as ownership remains with the leasing company. Some financing options may resemble ownership but do not transfer tax benefits, so homeowners should verify contract terms.
The credit is based on the installation completion date, not when the system begins generating electricity. Delays in utility approvals or inspections do not impact eligibility as long as the physical installation is completed within the tax year.
Applying Credits on Returns
Claiming the solar tax credit requires filing IRS Form 5695, which calculates the total credit amount based on eligible installation costs. This form is attached to Form 1040 when filing a federal tax return. The credit reduces tax liability but does not provide a refund beyond what is owed. For example, if a taxpayer qualifies for a $6,000 credit but owes $4,000 in taxes, the remaining $2,000 carries forward.
Qualified costs include solar panels, inverters, mounting equipment, wiring, labor, and permitting fees. However, unrelated expenses like roof repairs or cosmetic upgrades cannot be included unless directly required for the solar installation. Keeping itemized invoices and contracts helps substantiate claims in case of an IRS audit.
Coordination With Other Credits
Maximizing the solar tax credit requires careful planning when combined with other incentives. Taxpayers may also qualify for residential energy efficiency credits, such as those under the Inflation Reduction Act, which provides benefits for home upgrades like heat pumps and energy-efficient windows. These credits can be claimed alongside the solar tax credit but must be calculated separately.
For businesses, the ITC interacts with tax provisions like bonus depreciation under the Modified Accelerated Cost Recovery System (MACRS), allowing commercial solar owners to depreciate a significant portion of the system’s cost in the first year. However, claiming the ITC requires reducing the depreciable basis by half the credit amount, so business owners must determine the best way to allocate deductions.
State incentives can also affect the federal credit. Many states offer rebates or tax credits that may reduce the eligible cost basis. If a state provides a rebate at the point of sale, the IRS typically requires that amount to be deducted from the total installation cost before calculating the federal credit. Understanding how these incentives impact the net benefit ensures accurate claims.
Documentation for the IRS
The IRS requires taxpayers to maintain detailed records verifying the installation, cost, and eligibility of the solar system. These documents should be kept for at least three years from the date the credit is claimed, as the IRS may request supporting evidence.
Invoices and receipts should clearly itemize eligible costs, including equipment, labor, and permitting fees. Contracts or purchase agreements must show proof of ownership, as leased systems do not qualify. Correspondence with utility companies regarding net metering agreements or interconnection approvals can help establish the system’s operational status. Documentation of state or local incentives should also be retained, as they may impact the federal credit calculation.