Plan Your Solar Transition With the 26% Solar Tax Credit
There have always been many compelling reasons to transition to solar energy — it’s environmentally friendly, it boosts your property value and saves you lots of money in the long run. Some property owners may balk at the upfront costs associated with switching to solar energy. However, thanks to various tax incentives, adopting solar energy has become more affordable than ever before. These solar panel incentives won’t last forever, though, so if you’re going to transition to green energy, there’s no time like the present.
In this guide to going solar, we’ll discuss the various commercial and residential federal tax incentives currently available, as well as some extra incentives we offer at KC Green Energy.
Solar Tax Credit Decreases After 2022
Besides the money you save on your electric bill, one of the most significant financial reasons to install residential and commercial solar energy systems is the 26% federal solar tax credit. A tax credit is a dollar-to-dollar reduction of your income taxes that does not depend on your tax bracket. For instance, if you get a $9,000 tax credit, you’ll pay $9,000 less for that year’s taxes.
The currently available solar investment tax credit equals 26% of your solar energy system’s total cost, including all the following expenses.
- Contractor labor costs: These include preparing, assembling and installing the system, including inspection costs, developer fees and permitting fees.
- System equipment: These include inverters, mounting equipment and wiring.
- Energy storage devices: These are devices charged only by the solar PV panels.
- Sales tax: The total cost also includes sales tax on all eligible expenses.
For example, if you invested a total of $20,000 in your system, you’d get a $5,200 tax credit. While switching to solar will save you money no matter when you transition, the 2020 commercial and residential energy credit is as generous as it gets. From 2023 on, the tax credit will start decreasing, so the sooner you act, the more affordable your transition to solar will be. In 2023, the solar tax credit will drop to 22%, meaning you’ll only be able to deduct 22% of the cost of your solar energy system from your income taxes. In 2024, the tax credit will decrease even more, down to 10% — and it will only apply to commercial solar energy systems.
Note: To be eligible for this tax credit, you must own your system. Even if your tax liability isn’t enough to claim the full credit in a single year, you can roll it over into future tax years for as long as it’s still in effect. However, keep in mind that, if you sign a PPA or lease with a solar installer, you do not own the system and therefore are ineligible to claim the tax credit.
You claim this credit when filing your annual federal tax return. Don’t forget to notify your accountant that you’ve installed a solar energy system in the previous year. If you do your taxes yourself, refer to EnergySage’s guide to claiming this credit.
Another reason to begin your solar transition now: Current legislation allows you to claim the tax credit as soon as you have your system built, and it doesn’t even need to be functional. However, it must be operational by the end of 2023.
Solar Savings for Commercial Buildings
If you’re a business owner and want to transition to solar, you can claim a tax deduction.
What is a tax deduction, you may ask? Just like a tax credit, a tax deduction reduces how much money you have to pay in tax each year, but unlike a tax credit, the amount it saves you depends on your tax bracket.
For example, if your income was $800,000 one year and you claim a tax deduction of $300,000, your taxable income would go from $800,000 to $500,000.
If you’re in a 30% tax bracket and claimed a tax deduction of $300,000, that would lower your taxes by $90,000. If you’re in a 35% tax bracket, a $300,000 tax deduction would reduce your taxes even further, by $105,000.
As a business owner, you’re probably wondering how this deduction will affect your bottom line, and the answer depends on several factors:
- Your tax liability
- Your tax bracket
- The other deductions your business has
By lowering your taxable income, you will pay significantly less when it comes time to file your taxes. If you’re in a 30% tax bracket, this deduction is essentially the same as a 30% tax credit.
100% Bonus Depreciation
When you make an acquisition for your business — in this case, a solar energy system — its cost, for accounting purposes, traditionally gets spread out over that asset’s useful life. Accountants call this depreciation, and it sometimes works in your company’s favor. If depreciation doesn’t apply, your company’s financial statement may take a hit, showing lower profits or larger losses for the tax year when your company acquired the assets.
Another incentive for businesses to invest in solar energy is the bonus depreciation in the new tax law, which recently increased from 50 to 100%. This depreciation will apply to solar energy systems put in service until Jan. 1, 2023.
Bonus depreciation, also called the “additional first-year depreciation deduction,” refers to a tax incentive allowing businesses to deduct a significant percentage of the purchase cost of eligible assets, instead of writing them off over the assets’ “useful life.”
However, this incentive won’t last forever. After Jan. 1, 2023, the bonus depreciation rate will begin to decrease. Also, note that you must take bonus depreciation within the first year you place solar panels in service.
Clean Energy for Homes
In addition to the above tax incentives, KC Green offers some additional bonuses when you buy your new system from us.
- No money down: You pay no upfront costs with this option.
- Financing: KC Green offers rates starting at 0% interest for 12 years of 0.49% interest for 20 years (with a credit score of 640 or higher).
Go Solar With KC Green Energy
With a high-quality solar energy system installed, you could save significantly on your energy bills. There are many reasons to go solar — and even more reasons to do it as soon as possible. KC Green Energy can install your system quickly and efficiently, so you can start enjoying the benefits of solar as affordably as possible. Speak with our helpful and knowledgeable staff by filling out our online contact form.