It seems as if every time you turn on the television or drive down the street, you see ads extolling the virtues of solar energy for your home. Though the marketing may promise big tax advantages to a home solar installation, the truth is that there’s a lot more to the story than the solar companies are providing.
The ads imply that the government will pay thirty percent of the costs of a new solar system, but the truth is that after paying 70 percent of the costs, the best you can get from the federal government is a 30 percent tax credit – and that is a non-refundable credit, which means that rather than getting money back at the end of the year, the government uses the credit to reduce the amount that you owe.
If the amount of your credit is greater than what you owe Uncle Sam, the balance will get rolled over into what you owe next year, for as long as the credit remains up until the year 2021. This is far different from the picture that the solar companies paint.
Depending upon where you live, there may be additional incentives available – some states are offering additional credits. But even so, there are restrictions and qualifiers that you need to be aware of before making the solar leap.
The credits do not apply when solar equipment is installed in a home that is located outside of the United States, and they only apply for residences – not businesses. Once a building’s purpose is identified as being more than 20 percent for business, only the amount of the solar equipment expenses that are used for residential purposes can be used as a credit.
To understand how the nonrefundable solar tax credit works, imagine that the costs of a system are $25,000. The applicable costs can include both the hardware and the installation costs, including labor, preparation of the site, and any additional costs needed to complete the installation such as wiring or piping.
Thirty percent of the total cost can be taken as a solar credit, which would translate into $7,500. If the amount that you owe the federal government in taxes for the year of the system installation is more than $7,500, then the credit would be fully applied and reduce your tax burden by that amount. But if you only owe the government $4,000, it would leave you with $3,500 to be used against next year’s tax debt, and this would continue until either tax year 2021 or the credit is totally depleted, whichever comes first.
The solar tax credit needs to be claimed in the same year that the purchase and installation is made and completed in an existing home: in a newly constructed or reconstructed property the credit is taken in the year that the home begins to be used, but it is important that for new construction, all documentation and certifications are kept separate and apart from the other costs of construction.
In addition to being able to purchase a solar system for cash, installation companies offer the opportunity to take out loans. When the residence as used for collateral on these loans, the interest on the loans can be deducted.
Other companies offer the option of leasing the system, which eliminates the need to lay out a large amount of cash but also eliminates the opportunity to get the tax credit from the government. Though leasing may be an attractive alternative, it also leaves the purchaser with added complications when it comes time to sell their home, as the lease will need to be transferred.
In some communities, the local government has taken steps to offer payments through property taxes. Though this may seem attractive, a closer examination usually reveals that these payments are not deductible – only the interest on the loan can be added to the home mortgage interest deduction.
Further, the interest rates are higher than what could be accomplished privately. These arrangements are generally not in the owners’ best interest.
If you are giving consideration to adding a solar energy system to your home, make sure that you are doing so in a way that offers you the greatest financial advantage.
Our office will be happy to review the options and identify the method that works best for you. Call (909) 949-4898 to make an appointment!