Are you thinking about installing a new solar energy system in your home?
If the reason that the idea sounds so good is the promise of government funding of the project, then you need to take a closer look and make sure that you understand exactly what is being offered. Though the television ads definitely make it seem as if the government is paying for 30% of the costs, the truth is that you’ll get a credit of 30% of the cost of a qualified solar installation on your taxes. Though it is true that you may get additional reimbursement or credits depending upon what state you live in, it is important to know the limitations and restrictions of the federal program, as well as exactly how it works.
Current Tax Liability Only
Though you will receive a credit of 30% of the amount that you spent on your solar system to use against your taxes, this is a nonrefundable credit. That means that if you have a tax liability that is less than what the 30% amounts to, then the balance will be carried over to the next tax year and applied against it, and that process will continue until the credit is entirely used up. As things stand now, the rules indicate that you must have used the 30% credit by tax year 2021, though this may be extended in the future. The bottom line is that nobody is handing you a big wad of money and you’re not getting a big tax refund either.
The Credit in Practice
Say that you decide to go ahead with the solar energy installation, and the cost of the entire system is $25,000. Thirty percent of $25,000 is $7,500, and so that amount would be available for you to use as a credit against the income tax that you owe in the year of the installation. If during your tax preparation for the year, you calculate that you owe just $4,000, then you would be able to apply your credit to your liability and would still have $3,500 that you can apply next year, or for however long it takes to use it up.
What it Takes to Qualify
The other thing that you need to remember is that the tax credit is not available for every solar energy installation. It cannot be claimed if the system was purchased and installed for the purpose of running a hot tub, swimming pool, or similar recreational feature of your home. It is also not available for homes that report that they are used more than 20% for business purposes. If that is the case, then the solar energy credit for equipment and installation expenses can only be apportioned to the percentage of the home that is considered residential.
The good news is that the credit that is offered for the purchase of a solar energy system applies to all of the expenses involved, including labor and installation, assembly, and the hardware itself. Even the plumbing and electrical work, such as piping and wiring, are included in this comprehensive credit. The timing of taking the credit is fairly straightforward. The year that you install the equipment is the year that you take the credit, though if the installation is for new construction or a home that has been newly reconstructed, the credit is not available until the owner is occupying the home. In those instances, make sure that the cost of the solar system is separated out from the rest of the home’s costs and that you have all of the appropriate documentation breaking down the cost of the system.
Financing for Solar Energy Systems
Another thing that will play an important role in your ability to take a tax credit for your solar energy system lies in how you pay for it. Cash is certainly one option, but you also can borrow money to pay for the system. The advantage of doing this is that if you use your home as collateral against the loan, you are likely to be able to take the interest you pay on the loan each year as a deduction on your income taxes. Leasing, on the other hand, disqualifies you from receiving the 30% tax credit. You can’t deduct the lease payments and you face the possibility of future complications when the time comes to sell your home, as you will need to arrange to either transfer the lease or else pay it off and include the system in the selling cost of your home.
Though there are some areas in the country that are allowing taxpayers to finance payments of solar energy systems by adding it onto their property tax bill, we caution you against this approach, as it is generally offered at exorbitantly high interest rates. Even though these programs are generally offered through or financed by local government entities, they are not as good a deal as they sound – particularly because the payments can’t be deducted, even though they are paid along with your property taxes. The rules state that you can only deduct the interest portion of the cost.
If you are a Florida resident who is considering installing a solar energy system, you can get more information about it here. You can also give our office a call – we would be happy to discuss the available federal and local incentives, and help you find the approach that will work best for you.
If you need more unique tax information or want assistance from a skilled St. Petersburg professional, contact Tom Gargiulo, E.A. today at 727-345-7790 for help.