One of the most confusing parts about buying or leasing solar is also one of the best selling points: the tax credits and rebates. There are three major parts to the rebates and incentives when installing solar. The first is the federal tax credit. It is the same for everyone in the country. Next is the state tax credit, and this varies from state to state. Last, some power companies will also offer a rebate for installing solar.
Before I explain each rebate further, there is one very important thing to know about the federal and state tax credits that is never explained very well. The money that is reimbursed by the federal and state governments is a dollar for dollar tax credit that you apply for when you do your taxes. Meaning you have to have paid at least as much money in federal or state taxes during that calendar year as you expect to get back for your solar installation.
For example, if I purchased a $30,000 solar array I would be entitled to 30% of that cost, or $9,000, back from the federal government. In order to get the full amount of that money back when I do my taxes, I need to have paid at least $9,000 in federal taxes during that calendar year. If I have not paid at least $9,000 in federal taxes that year, the remaining credit will be applied the following year. So in this example, if I had only paid $7,000 in federal taxes, I would receive a check for $7,000 this year and could apply the remaining $2,000 toward my federal tax next year. The same situation applies for any state tax credits for which you would be eligible.
This information becomes very important if, like me, you take out a same as cash bridge loan that must be paid off in a specified time or incur heavy interest payments. Most of these loans are for 12 to 18 months and would not cover the time it would take to complete two tax returns.
The leasing situation is different, and I will explain how each credit is applied to both buying and leasing below.
Federal Solar Tax Credits
Congress has agreed to extend the 30 percent solar tax credit through 2019, after which it will fall to 26 percent in 2020, 22 percent in 2021 and 10 percent in 2022.
Purchasing Solar: When you purchase a solar system, you are entitled to the rebates above in the form of a tax credit. As previously explained, you apply for this tax credit at the end of the year when you do your taxes. You must have paid at least the tax credit amount in federal taxes in order to receive the full credit in one year, otherwise any remaining credit will be applied to the following year’s taxes.
Leasing Solar: When you lease a solar system, you are not eligible to receive the federal tax credits listed above. You will sign a contract with your leasing company surrendering the full amount of the tax credit to the leasing company.
State Solar Tax Credits
The state solar tax credit varies from state to state, and many states do not offer incentives at all. I recommend you look up your state’s residential solar tax credit on the US Department of Energy Tax Credits, Rebates & Savings page.
Purchasing Solar: When you purchase a solar system, you are entitled to a tax credit based on your state’s policy. As previously explained, you apply for this tax credit at the end of the year when you do your taxes. You must have paid at least the tax credit amount in state taxes in order to receive the full credit in one year, otherwise any remaining credit will be applied to the following year’s taxes.
Leasing Solar: When you lease a solar system, you cannot claim the cost of the solar system for a tax credit, however, in some states they will allow you to claim two years or the maximum credit cap worth of electric bills as tax credits. For instance, in New York the state offers a tax credit of 25% of the system cost up to $5,000. If you leased a $30,000 solar system, you would be entitled to up to $5,000 in tax credits for your electric usage during the first two years you use your solar system. While it is unlikely you will use $5,000 worth of electricity in two years, it’s nice to know you will get two years of electricity for free.
Power Company Rebates
Like the state solar tax credits, these rebates vary from state to state and power company to power company. Unfortunately there are far too many power companies for me to provide a concise resource, so I advise you to check with your current provider, and any other providers you may be eligible to work with. Usually, the power company will provide an instant rebate directly to your solar installer. My power company is PSEG, and in my area they have a pool of money available for solar rebates. As the year progresses and the pool of money gets smaller, the rebates get smaller. Once the pool is gone for that calendar year, so are the rebates. Your solar installer would be able to tell you if this is the case in your area and what amount the pool is currently paying.
Purchasing Solar: Any rebates offered by the power company are sent directly from the power company to the solar installer. Your purchase price will reflect the total amount, less the power company rebate.
Leasing Solar: Like purchasing, any rebates offered will be sent directly from the power company to your leasing company. This will not reduce your payments or affect your lease.