Claiming the 2020 Solar Tax Credit
Get a detailed overview of the financial considerations and tax mechanics behind the 2020 residential solar credit for homeowners.
The federal solar tax credit, now known as the Residential Clean Energy Credit, is a government incentive designed to encourage homeowners to adopt renewable energy. This nonrefundable credit can lower or even eliminate a taxpayer’s income tax liability for the year, reducing the overall financial burden of installing a solar energy system. The Inflation Reduction Act of 2022 increased the credit to 30% for qualifying systems placed in service from 2022 through 2032. The rate is scheduled to decrease to 26% in 2033 and 22% in 2034.
Eligibility Requirements
To qualify for the residential solar credit, the solar photovoltaic (PV) system must be placed in service during the tax year. The IRS considers a system placed in service when the original installation is complete, and the system is ready and available for use.
A requirement for claiming the credit is ownership of the solar PV system. This means the taxpayer must have purchased the system, either with cash or through financing. Individuals who lease a system or enter into a power purchase agreement where they only buy the electricity generated are not eligible, as they do not own the equipment.
The solar equipment must be installed on a residence located in the United States. This includes a taxpayer’s primary or secondary home, which could be a traditional house, houseboat, mobile home, cooperative apartment, or condominium. Renters cannot claim the credit, but a tenant-stockholder in a co-op or a condo member who contributes to the cost of a system can claim their share of the expense.
Finally, the credit is only available for new solar equipment. The tax law specifies that the credit can be claimed on the “original installation” of the solar components. This prevents taxpayers from claiming a credit on a used system that was moved from one property to another or purchased secondhand.
Qualified Solar Electric Property Costs
When calculating the basis for the credit, taxpayers can include the full cost of the solar panels and other essential equipment. This includes items like inverters, which convert the direct current (DC) electricity from the panels to the alternating current (AC) used in homes, as well as the mounting equipment, wiring, and electrical components needed to connect the system.
Labor costs for the original installation are also includable in the total calculation. This covers expenses for onsite preparation, the assembly of the system components, and the labor for the installation itself. Sales taxes paid on eligible equipment and labor are also permitted to be added to the total cost base before calculating the credit amount.
For battery storage technology placed in service in 2023 and beyond, the rules have been updated. Battery storage with a capacity of 3 kilowatt-hours or greater is now eligible for the credit, and the previous requirement that it be charged exclusively by solar panels no longer applies.
Certain expenses are explicitly excluded from the calculation. For instance, the costs of structural improvements to a home’s roof are not allowed. If a homeowner had to replace roof trusses or decking to support the new panels, those costs could not be included. An exception exists if the roofing itself is a functional part of the solar technology, such as integrated solar shingles, but standard roof repairs are not covered. In cases of joint occupancy where unmarried individuals share a home, the qualified costs are allocated based on each person’s contribution percentage to the system’s total cost.
Information and Forms for Claiming the Credit
To begin the process of claiming the credit, a taxpayer first needs to gather and sum all qualified expenses. This total figure serves as the starting point for the calculation, and it is important to have meticulous records to back up this number.
Taxpayers are required to maintain detailed documentation to substantiate their claim. This documentation includes purchase invoices for the panels and equipment, contracts with the installer, and proof of payment, such as canceled checks or credit card statements.
The tax form required to claim the credit is Form 5695, Residential Energy Credits. Taxpayers must use the version of the form designated for the year the system was placed in service.
On Part I of Form 5695, the taxpayer enters the total qualified solar electric property costs. The form then guides the calculation based on the applicable credit rate. The form also includes a worksheet to determine if the taxpayer’s tax liability is large enough to claim the full credit.
Filing and Post-Filing Considerations
After completing Form 5695, it must be submitted with the taxpayer’s annual federal tax return by attaching it to Form 1040. If a taxpayer needs to amend a previously filed return, Form 5695 is attached to a Form 1040-X, Amended U.S. Individual Income Tax Return.
The final credit amount calculated on Form 5695 is then transferred to Schedule 3 (Form 1040), Additional Credits and Payments. This is where the solar credit is used to directly reduce the taxpayer’s total tax liability.
A feature of the credit is the carryforward provision. If the calculated solar credit is greater than the taxpayer’s tax liability for that year, the unused portion is not lost. Instead, any excess credit can be carried forward to the subsequent tax year to be applied against that year’s tax liability.