A Guide to Solar Tax Credit, Rebates, and Incentives in the US

Solar Incentives 101: How to Save Big on Your Solar Panel Installation

Key Details

• Federal and State tax incentives help encourage the use of solar energy.
• Solar Rebates are monetary rewards for installing solar panels, which can be provided through government or utility companies.
• Laws that support solar energy, such as Net Metering and Solar Renewable Energy Certificates (SRECs), are also incentives for reducing costs associated with solar energy production.
• The federal solar tax credit is a refundable tax credit that can be claimed on federal income taxes.
• State Tax Credits and Solar Production Tax Credit (PTC) vary from state-to-state but provide additional reductions in tax bills when individuals install solar systems in their homes.

From rebates to solar tax credits and other incentives, navigating the different energy programs available can be complex and overwhelming. However, understanding the details of these solar incentives is crucial to maximizing the benefits of going solar.

In this article, we will provide a guide to solar tax credits, rebates and other performance based incentives, as well as explain the various programs and requirements to help you make informed decisions about investing in solar energy in the US.

How to Benefit from the Different Types of Solar Rebates and Incentives

The primary categories of solar rebates and incentives include:

• Tax Incentives for Solar Power
• Solar Power Rebates
• Performance-Based Incentives for Solar Power
• Favorable Solar Incentive Laws

Learn More About Your State's Solar Incentives

Are Solar Tax Incentives Available in the United States?

Yes. Governments at the federal or state levels frequently offer tax exemptions for solar installations to encourage the use of renewable energy. The two most common types include property tax exemptions and sales tax exemptions. These exemptions are given by the state and local governments.

How to Save with Solar Property Tax Exemptions in the US

Property tax exemptions permit residential and commercial property owners to disregard the added value of a solar installation for their property tax valuation.

A property tax exemption helps reduce the financial burden associated with putting solar panels on a home or business.

States typically differ on the type of property tax exemptions they offer. Due to the fact that property taxes are collected at the municipal level, some states give local taxing authorities the option to permit a property tax incentive for solar.

US States Offering Solar Energy Property Tax Exemptions

How to Reduce Installation Costs with Solar Sale Tax Exemptions

Sales tax exemptions are tax incentives that help you reduce the initial costs of a solar installation.

For instance, Arizona exempts the retail selling of solar energy equipment and the installation of solar energy equipment by contractors from sales tax.

Similarly, all purchases, storage, and use of parts used to create alternating current electricity from a renewable energy source are exempt from Colorado's sales and use tax. All purchases, storage, and usage of solar thermal system components are also exempt from this rule.

Sales tax exemptions are available based on the cost of a home solar project in each state.

For instance, if the typical solar PV system costs about $18,000 before taxes and incentives, the sales tax in states without solar sales tax exemptions may add an extra cost of between $800 and $1,300.

In contrast, persons who purchase solar systems in their homes stand to save between $980 and $1,700 on the same system in the states that do give sales tax exemptions for solar.

US States Offering Solar Energy Sales Tax Exemptions

Property Tax vs Sales Tax

How to Save with US Solar Tax Credits

A tax credit is a decrease in your tax liability that is given as an incentive for adopting solar energy:

A tax credit is the financial sum you can deduct from your taxable income.

Because it applies to the entire nation, the 30% federal tax credit is perhaps the most well-known example.

State tax credits are available in addition to the federal government incentive. For instance, the state of New York provides a tax deduction for 25% of your solar energy expenditure up to $5,000.

If you buy a $20,000 solar PV system in New York, you will receive a 30% federal tax credit ($6,000) and a 25% state tax credit ($5,000). The net expense is only $9,000, and you receive more than half of the money you invested back in tax benefits.

When you are granted a tax credit, it reduces the amount of tax you must pay. For example, say that you get a $600 tax credit on your tax bill of $3,500. The available tax credit will reduce your tax bill to $2,900.

How to Save with the Federal Solar Tax Credits

The federal solar tax credit is a refundable tax credit equivalent to a portion of the cost of a solar PV system that can be claimed on federal income taxes. The federal solar tax credit is worth 30% of the total cost of your solar installation. This means that your credit would be $6,000 if the total system cost was $20,000 ($20,000 x 30% = $6,000).

This tax credit does not result in the issuance of a paper check. Instead, you receive a percentage reduction in your taxable income for the tax year.

The federal tax credit for solar energy can only be claimed once. In addition, the system must be entirely installed, operational, and powering a U.S. residence during the tax year.

Under the Inflation Reduction Act, homeowners can claim a tax credit equal to 30% of the cost of residential solar installation until 2032. In 2033 and 2034, the credit will decrease to 26% and 22%, respectively. The tax credit expires afterward.

Federal Solar Investment Tax Credit (ITC)

The investment tax credit (ITC) is a federal tax credit that lowers an individual's income tax liability for a portion of the expense of installing a solar system during the tax year.

The Investment Tax Credit (ITC) is a federal tax credit of 30% available to residential (under Section 25D) and business and utility (under Section 48) investors in solar energy property.

Homeowners incorporate Section 25D domestic ITC to personal income taxes after buying and installing solar systems on their homes. In contrast, Section 48 credit is claimed by the company that installs, develops, and/or funds the project.

Under the Inflation Reduction Act, the ITC will continue in accordance with the following timetable: 30% of the cost of solar installation until 2032 and decline to 26% and 22% in 2033 and 2034, respectively. The ITC will expire in 2035.

If a commercial or utility-scale project is started before December 31, 2023 and put into operation before January 1, 2026, it may still be eligible for the lower ITC rate of 26% or 22%.

Federal Solar Production Tax Credit (PTC).

Under Section 45 of the Internal Revenue Code, PTC is a per kilowatt-hour (kWh) federal tax credit for electricity produced by qualified renewable energy resources. Companies can receive a tax credit of up to 1.3 cents per kilowatt hour for power produced using renewable sources. Some examples of these types of renewable energy sources are landfill gas (LFG), open-loop biomass, and municipal solid waste resources.

Others include small irrigation power facilities, with prices for electricity produced from wind, closed-loop biomass, and geothermal resources reaching as high as 2.6 cents/kWh.

New wage and apprenticeship standards for systems larger than 1 MW are mandated by the Inflation Reduction Act of 2022. The minimum per-kilowatt-hour tax rebate for these types of projects is 0.5 cents/kWh. However, these programs are eligible for the total credit if the requirements concerning labor are fulfilled. The Inflation Reduction Act also includes two bonus credits for initiatives of any scale.

One is for using domestic steel/iron materials, and the other is for locating in an "energy community." (a brownfield site or location that depends on coal, oil, or natural gas extraction historically as part of its economy in addition to high unemployment).

To qualify, renewable energy projects must begin construction after December 31, 2021, and on or before January 1, 2025, if their capacity is less than 1 MW. Projects with a capacity greater than 1 MW may start construction after January 30, 2023 (60 days after the IRS provides guidelines for labor costs). The project must commence by January 1, 2025.

What are State Solar Tax Credits?

State tax credits function in the same manner as the federal IT. However, they are only applicable to the host state, as opposed to federal tax credits, which apply to all states in the nation. As a consequence, the exact amounts differ significantly from one state to the next.

In most cases, solar PV installation tax credits offered by the federal government are not reduced by state tax credits and vice versa. However, since you can no longer deduct as much state income tax after receiving a state tax refund, your federal taxable income will increase. If you file for a state tax credit, the federal government will tax you on the value of the credit.

Solar Power Rebates

A rebate can be described as a monetary reward for installing solar panels. This discount is taken right off the top of your initial investment. Most solar rebates are distributed through government or utility company-run initiatives.

However, some prerequisites must be met. For example, you need to have qualified solar panel designers and installers work on your system. One such program is the Residential Clean Energy Rebate Program in Maryland. Systems greater than 1kW qualify for the $1,000 rebate.

Performance-Based Incentives for Solar Power

One incentive strategy is to lower the total cost of solar power systems through rebates and tax advantages. Programs that concentrate on boosting a solar power system's revenue flow are also available. There are two typical choices:

• Adding a performance payment per kilowatt-hour produced.
• Establishing a Solar Renewable Energy Credits (SREC) program.

Bonus Payments per Kilowatt-Hour

Owners of solar power systems receive additional funds for each kilowatt-hour produced when performance payments are offered.

The total benefit, for instance, would be 20 cents/kWh if the local energy price was 15 cents/kWh and there was a 5-cent/kWh incentive. This increases return on investment while decreasing the time solar cells take to pay for themselves.

This type of incentive quickly fills its capacity limit because it is pretty appealing.

Solar Renewable Energy Credits

SREC programs are an alternative to bonus payments per kWh. SRECs can be implemented after municipalities have established sustainable energy goals for utilities and large energy consumers.

These organizations can do so by generating their own clean energy, by purchasing SRECs in quantity equal to their goal, or through a combination of the two.

• One Solar Renewable Energy Credit (SREC) is given to solar PV system owners for each 1,000 kWh generated.
• The company will then buy SRECs if they have renewable energy goals.
• The benefit is variable because the price of SRECs is set by supply and demand. But it's an excellent financial perk on top of the solar energy cost reductions.

Favorable Solar Incentive Laws

Since solar panels provide more advantages to home and company owners, legislation that supports solar energy can be seen as an incentive.

How to Save with Net Metering

By using net metering, solar energy systems can receive complete credit for all of the energy they contribute to the power grid. This is a common occurrence in solar-powered houses that are unoccupied during the middle of the day. Covering a big area with solar panels allows businesses with large roofs to achieve surplus production.

Feed-in Tariff

A feed-in rate is an alternative to net metering provided by some utility providers. For the most part, this tariff is cheaper than the cost of electricity because it is justified by the fact that utility companies must deal with solar cells' overproduction of power.

Simple Interconnection

The initial investment in a solar power system can be decreased by following easy interconnection guidelines, which increases the system's return on investment. Consumers are less likely to switch to solar power when utilities implement stringent connection requirements with high fees.

Renewable Portfolio Standard (RPS)

Incentives for solar energy can also be provided by having a Renewable Portfolio Standard (RPS). Basically, what an RPS does is mandate a certain amount of renewable energy use from investor-owned utilities in a given jurisdiction. Utilities required to comply with RPS regulations typically implement incentive programs to encourage the installation of clean energy systems by their customers.

How do Solar Renewable Energy Certificates (SREC) Work?

Solar Renewable Energy Certificates, also called Solar Renewable Energy Credits, are a way to "sell" the benefits of solar power and make a market for them. SRECs are a way to measure and verify how much solar power a home or business with solar panels placed makes, and they let utilities pay for that solar power.

The Renewable Portfolio Standard is a scheme that gives out Solar Renewable Energy Certificates (SRECs). (RPS). RPS is a law that 36 states have passed in some form or another. It is in place to help energy companies build their green portfolios. SRECs are a part of the RPS that says that a certain amount of green energy output must come from solar power. This is how states reach their goals, like Maryland's 25% by 2020 and New Jersey's 50% by 2030, for producing green energy.

Owners of a solar system can get 1 SREC for every 1,000 kWh or 1 MWh of solar electricity generated by their system. The certificate can then be documented and sold, which brings in more money for the person who owns the system.

The table below highlights states with active SRECs markets.

How Does Net Metering Work in the US?

Net metering is a billing system that allows homeowners who install solar panels to be compensated for the energy that their systems produce but do not use directly. During the day, a house with a photovoltaic (PV) system installed on its roof may produce more energy than it consumes.

When the home's electricity use exceeds the system's output, such as at night or during other times of low electricity demand, the electricity meter will cycle backward, providing a credit against what electricity is consumed during those times.

Net energy use is what customers are charged for. A solar energy system typically exports between 20% and 40% of its total production to the grid. The exported solar power serves the needs of local customers.

How Net Metering Works

This is how the system will operate if you have a home solar array (or wind turbine) and have been given net metering approval:

• Sunlight energy is captured by your solar panels (or wind turbine) and transformed into direct current (DC) power.
• You have an inverter that changes direct current (DC) energy into alternating current (AC).
• You initially use that electricity to power your house or place of work.
• Any extra energy is distributed to other customers through the main electrical grid.
• A smart meter monitors the flow of energy into and out of the grid. Any extra electricity produced is credited to your account, based on your utility provider, either to reduce your cost or as a payment.