The solar tax credit, also known as the Investment Tax Credit (ITC), is a significant incentive offered by the federal government to encourage the adoption of solar energy systems. It allows eligible residential and commercial property owners to claim a percentage of their solar installation costs as a tax credit.
However, what if you don’t owe taxes? In this blog, we will explore how the solar tax credit works for individuals who have little or no tax liability and provide insights into alternative options to benefit from this valuable incentive.
Understanding the Solar Tax Credit: The solar tax credit enables eligible homeowners and businesses to claim a credit of a certain percentage of their qualified solar energy system expenses. The solar tax credit value currently is 30% till 2032. In 2033, it will be brought down to 26%, in 2034 it will be 22% and 0% in 2035.
Offsetting Tax Liability: Traditionally, tax credits are used to offset tax liability, reducing the amount of taxes owed. If you have sufficient tax liability, the solar tax credit can be applied to reduce your tax bill dollar-for-dollar. Example: If your tax liability is $10,000 and your solar tax credit is $3,000. The net tax owed will be $10,000 – $3,000 = $7,000.
However, what if your tax liability is lower or you don’t owe any taxes at all? In such cases, the solar tax credit can still be beneficial.
Carrying Over Unused Tax Credit: If your tax liability is lower than the available solar tax credit amount, you can carry over the unused credit to future tax years. The unused portion of the credit can be applied to offset your tax liability in subsequent years until the credit is fully utilized. This is known as a “tax credit carryover” or “tax credit rollover.” It’s essential to consult with a tax professional to understand the specific rules and limitations regarding carrying over the solar tax credit.
Using a Third-Party Tax Equity Investor: Another option for individuals who don’t owe taxes is to consider partnering with a third-party tax equity investor. These investors can take advantage of the solar tax credit by financing the installation of solar systems on your property. In return, the investor claims the tax credit, while you benefit from reduced energy costs through a power purchase agreement (PPA) or lease arrangement. This option allows individuals without tax liability to still enjoy the financial advantages of solar energy.
State and Local Incentives: In addition to the federal solar tax credit, it’s important to explore state and local incentives that may be available to you. Some states offer their own solar incentives, such as rebates, grants, or additional tax credits. These incentives can provide further financial support, independent of your federal tax liability.
If you don’t owe taxes or have limited tax liability, you can still benefit from the solar tax credit. By carrying over unused tax credits to future years and exploring options like partnering with a tax equity investor, you can make the most of this incentive. Additionally, remember to investigate state and local incentives that can supplement your savings. While consulting with a tax professional is recommended to ensure compliance with regulations, understanding alternative options empowers you to embrace solar energy and enjoy the associated financial advantages, even if you don’t owe taxes.