How Does the Hawaii Solar Tax Credit Work?

The Hawaii Renewable Energy Technologies Income Tax Credit (RETITC) is a state incentive encouraging renewable energy system adoption. It directly reduces an individual’s or business’s state income tax liability. The credit’s purpose is to make investing in solar photovoltaic (PV) systems, solar water heating, and other qualifying renewable energy technologies more financially accessible. It functions as a direct reduction of taxes owed, rather than a deduction from taxable income.

Qualifying for the Credit

To qualify for the RETITC, specific criteria apply to both the claimant and the installed system. Individual homeowners, corporations, and other business entities are eligible. The system must be installed and placed in service within Hawaii.

The credit applies to solar photovoltaic (PV) systems, solar water heating systems, and wind energy systems. Residential PV systems generally require a minimum rating of 5 kWh. The system must be fully installed and operational by the end of the tax year the credit is claimed.

Both new installations and additions to existing systems may be eligible. The credit is available for systems on residential properties (single-family homes and multi-family units) and commercial properties. For partnerships, S corporations, estates, or trusts, the credit is determined at the entity level for eligible systems installed in the state.

Determining Eligible Costs and Credit Amount

The RETITC provides a financial incentive, covering a percentage of eligible costs up to specific caps. For solar PV systems, the credit is generally 35% of the actual cost of equipment and installation. This applies to costs such as solar panels, labor, permitting, design fees, and sales tax. Battery storage systems exceeding 3 kWh may also be included as eligible expenses when paired with a qualifying solar PV system.

The credit amount is subject to maximum caps, which vary by property type and system. For single-family residential PV systems, the credit is capped at $5,000 per system. Hawaii administrative rules define a residential PV “system” as 5 kilowatts (kW) of installed capacity. Larger systems may qualify for multiple $5,000 caps; for instance, a 7.5 kW system might be treated as one 5 kW system and one 2.5 kW system, each potentially eligible for the 35% credit up to the $5,000 cap.

For solar water heating systems, the single-family residential cap is $2,250 per system. Multi-family residential properties have different caps, such as $350 per unit per system for solar thermal and PV. Commercial PV systems have a cap of $500,000 per system. Any utility rebates must be deducted from the system’s cost before calculating the state tax credit. When combining the state credit with the federal solar tax credit, the state credit is typically calculated first, and the federal credit is then applied to the remaining eligible cost basis.

Gathering Information and Documentation

Claiming the RETITC requires specific information. You will need detailed invoices for all eligible expenses, including equipment cost, labor for installation, and any associated permits or design fees. Proof of payment for these expenses should also be maintained.

Documentation confirming the system’s specifications, such as its capacity and in-service date, is also necessary. This may include system certification documents or completion notices from your installer. These records are essential for accurately calculating the credit amount and substantiating your claim if requested by the Department of Taxation.

The primary state tax form for this credit is Form N-342, titled “Renewable Energy Technologies Income Tax Credit.” This form applies to both individual and business taxpayers. Transfer key information from your documents, such as total eligible costs and installation date, directly onto Form N-342. This form, along with its instructions, can typically be obtained from the Hawaii Department of Taxation’s website.

Filing Your Claim

After completing Form N-342, submit your claim with your Hawaii state income tax return. The calculated credit amount from Form N-342 is then transferred to the appropriate line on your main state tax form. For individual taxpayers, this is typically Form N-11, while businesses might use forms like Form N-20 for corporations.

When filing electronically, generally attach Form N-342 as a supporting document to your e-filed return. If filing a paper return, Form N-342 should be attached to your main tax form before mailing. Adhere to standard tax filing deadlines, which typically align with federal deadlines, to ensure your claim is processed timely.

Following submission, the Department of Taxation processes the return. While processing times can vary, taxpayers generally receive confirmation of receipt, especially with electronic filing. The Department may issue follow-up inquiries if additional clarification or documentation is needed to verify the credit claim.

Applying the Credit and Carryforward Provisions

Once approved, the RETITC directly reduces your Hawaii state income tax liability. The credit acts as a dollar-for-dollar reduction against the taxes you owe. For example, if you owe $2,000 in state taxes and have a $1,500 credit, your tax liability would be reduced to $500.

If the credit exceeds your tax liability for the year it is claimed, the unused portion is not lost. Hawaii law includes carryforward provisions, allowing you to carry forward the remaining credit to subsequent tax years. This carryforward can be utilized until the full credit amount has been applied against future tax liabilities.

Under certain conditions, a refundable option may be available. If a taxpayer elects this option, the credit amount may be reduced by a percentage, such as 30%, but the state may issue a direct refund for the excess amount. This refundable option can be beneficial for taxpayers with limited or no income tax liability in the year the system is placed in service.