How to Write Off Solar Panels on Taxes for Maximum Savings

Installing solar panels can be a significant investment, but tax incentives help offset the cost. By properly claiming available deductions and credits, homeowners and businesses can maximize savings while supporting renewable energy.

Eligibility for Federal Energy Credit

The federal government offers a tax credit to encourage solar energy adoption. The Residential Clean Energy Credit, part of the Inflation Reduction Act, allows taxpayers to claim 30% of a solar energy system’s cost for installations completed between 2022 and 2032. This percentage drops to 26% in 2033 and 22% in 2034 before expiring in 2035 unless extended by Congress.

To qualify, the solar panels must be installed on a property you own and use as a primary or secondary residence. Rental properties do not qualify unless you also live there part of the year. The credit applies to both new and existing homes, provided the system is new and not previously used.

Eligible expenses include solar panels, inverters, mounting equipment, wiring, labor, and permitting fees. Battery storage systems qualify if they store solar energy and have a capacity of at least 3 kilowatt-hours, even if installed separately from the panels.

Filing Requirements

To claim the credit, taxpayers must submit IRS Form 5695 with their federal tax return. This form calculates the credit amount, which then transfers to Schedule 3 of Form 1040. The credit is nonrefundable, meaning it can reduce tax liability to zero but does not generate a refund. Any unused portion can be carried forward to future tax years.

Form 5695 requires detailing the total cost of the solar installation. The credit applies only to costs incurred in the tax year the system is completed. If installation spans multiple years, costs can only be claimed in the year the project is finished.

For financed solar panels, only out-of-pocket expenses qualify. Rebates from utility companies or state programs that reduce the purchase price must be excluded from the total cost when calculating the credit. However, state tax credits do not affect the federal credit unless they involve direct reimbursement from a government agency.

Documentation and Recordkeeping

Maintaining thorough records is essential to substantiate your claim in case of an IRS audit. Keep itemized invoices and receipts from contractors, suppliers, and manufacturers, detailing equipment costs, labor, and fees. If financing was used, retain loan agreements and payment records to confirm out-of-pocket expenses.

Technical specifications of the system also play a role in eligibility verification. Retain product certifications showing that the solar panels and battery storage meet IRS requirements. Manufacturers often provide documents verifying compliance with Department of Energy or Solar Rating and Certification Corporation (SRCC) standards. Installation permits and final inspection reports from local authorities further support eligibility.

Business or Home Office Use

Businesses and self-employed individuals installing solar panels on commercial properties or home offices may qualify for additional tax benefits. The Investment Tax Credit (ITC), under Section 48 of the Internal Revenue Code, provides a 30% credit for commercial solar installations. Unlike the residential credit, businesses can also use depreciation to further reduce taxable income.

Under the Modified Accelerated Cost Recovery System (MACRS), solar energy systems qualify for a five-year depreciation schedule. The Tax Cuts and Jobs Act allows an immediate 80% deduction of the system’s cost in the first year for projects placed in service in 2024, with this percentage phasing down in future years unless extended.

For self-employed individuals using solar panels for a home office, the deduction must be allocated based on the percentage of the home used for business. If 20% of the home is dedicated to business activities, only that portion of the system’s cost can be depreciated under MACRS. Proper allocation is necessary to avoid miscalculations that could trigger an IRS audit.

State and Local Credits

Many states and municipalities offer additional tax credits, rebates, and exemptions to lower the cost of installing solar panels. These programs vary by location, with some states providing direct tax reductions and others offering performance-based incentives tied to energy production.

New York allows residents to claim a state income tax credit of up to 25% of their solar system’s cost, capped at $5,000. South Carolina offers a similar 25% credit, which can be carried forward for up to ten years if it exceeds the taxpayer’s liability. Arizona and Massachusetts provide sales tax exemptions on solar equipment, reducing upfront costs. Florida and Texas offer property tax exemptions, preventing homeowners from being taxed on the increased home value from solar panel installation.

Some utility companies and local governments provide rebates that directly lower installation costs. These programs often require pre-approval and operate on a first-come, first-served basis. Performance-based incentives, such as Solar Renewable Energy Certificates (SRECs), allow homeowners in states like New Jersey and Maryland to earn credits based on the electricity their system generates. These credits can be sold to utility companies to help them meet renewable energy requirements. Checking with state energy departments and local utility providers ensures all available incentives are utilized.