How to Get the Arizona Solar Tax Credit and Maximize Savings

Switching to solar energy in Arizona can lower electricity bills and provide tax benefits. The state offers a solar tax credit that helps offset installation costs, making it more affordable for homeowners. Understanding how this credit works ensures you maximize your savings.

Eligibility Requirements

Arizona’s solar tax credit is available to homeowners who install a qualifying system on their primary residence. The system must be new, purchased outright or financed, and meet Arizona Department of Revenue (ADOR) guidelines. Leased systems and power purchase agreements (PPAs) do not qualify since ownership remains with the provider.

The property must be owner-occupied, excluding rental properties and commercial buildings. The system must comply with state and local regulations, including necessary permits and inspections, and be installed by a licensed contractor under Arizona law.

Qualifying solar energy devices include photovoltaic (PV) panels and solar water heaters designed to generate electricity or heat water for residential use. Battery storage systems qualify only if integrated with an eligible solar installation. The system must be operational in the tax year for which the credit is claimed.

How the Credit Is Calculated

Arizona’s solar tax credit covers 25% of the system’s cost, up to a maximum of $1,000. This nonrefundable credit can reduce state income tax liability to zero but does not result in a refund. Any unused portion can be carried forward for up to five years.

The credit applies to the total installation cost, including equipment and labor. For example, a $12,000 system would generate a $3,000 credit, but the cap limits the claim to $1,000. If a homeowner’s state tax liability is $800, they can apply that amount and carry forward the remaining $200.

Unlike federal tax incentives, Arizona does not require homeowners to deduct utility rebates from the total project cost before calculating the credit. This allows homeowners to claim the full state credit without adjustments for rebates received from power companies.

Application Steps and Forms

To claim the credit, homeowners must submit the appropriate tax forms with supporting documentation when filing their state income tax return.

The primary form required is Arizona Form 310, which details the total system cost, credit amount claimed, and any unused credit carried forward. Homeowners should reference their installation invoice, which itemizes costs and serves as proof of expenses.

Once Form 310 is completed, the credit amount must also be entered on Arizona Form 140, the standard individual income tax return. Since the credit directly offsets state tax liability, homeowners should ensure the amount claimed does not exceed their tax owed. Any unused portion should be recorded for future carryforward claims.

Coordination With Federal Credits

Arizona’s solar tax credit operates independently of the federal Investment Tax Credit (ITC), allowing homeowners to claim both without one affecting the other. However, the ITC—currently 30% of eligible solar expenses—is calculated based on net installation costs after state incentives.

Because Arizona’s credit reduces state tax liability rather than installation costs, it does not lower the federal credit calculation. This differs from state-level rebates, which reduce the project’s net cost before applying the ITC. Understanding this distinction helps homeowners avoid miscalculations that could reduce their federal tax benefit.

Record Retention for Audits

Homeowners should keep all relevant records for at least five years in case of an audit by the Arizona Department of Revenue. Essential documents include the final invoice from the solar installer, detailing total cost, equipment specifications, and installation date. Copies of Arizona Form 310 and Form 140 should also be retained, along with any correspondence with ADOR regarding the credit.

If the system was financed, loan agreements and payment records should be kept to confirm ownership. For homeowners carrying forward unused portions of the credit, maintaining prior years’ tax returns ensures accurate tracking of the remaining balance.

Carryforward Considerations

Since the Arizona Solar Tax Credit is nonrefundable, any unused portion can be carried forward for up to five years. Homeowners with lower annual tax liabilities can still benefit from the full credit over time, but planning is necessary to ensure it is used before expiration.

Estimating future tax obligations and adjusting withholdings or estimated payments can help maximize the credit. If a homeowner expects a significant drop in taxable income—such as retirement or business losses—it may be beneficial to claim as much of the credit as possible in earlier years. Reviewing state tax projections with a financial advisor or tax professional can help determine the best strategy for applying carryforward amounts before they lapse.