If you’re a solar thermal installer or a business or homeowner that has installed a solar hot water system in 2012, then you no doubt know that you’re eligible for the Federal Investment Tax Credit (ITC), which provides a 30% tax credit that can substantially reduce your installation cost.
If you’re looking for the 2012 IRS forms to receive your credit, here they are below. If you’re a solar hot water installer or architect, you may want to forward this post to your clients as a courtesy.
- Here is the IRS Form 5695 for the Residential Renewable Energy Tax Credit.
- On the 1040 form, tax credit (from Form 5695 above) is claimed on line 52.
- For the Business Energy Investment Tax Credit, use Form 3468.
Also, here are some frequently asked questions about the 30% Federal ITC that may also be useful to you or your clients. Please confirm all of this information with your own tax consultant.
What is a Tax Credit?
Many homeowners confuse a tax credit with a tax deduction. A tax credit is like an IRS gift card. Instead of cash, you use the value of the credit to pay your taxes. With a tax deduction, the amount of the deduction simply reduces your total earned income, which is then taxed at the applicable rate.
So, a tax credit is much more valuable—assuming that you owe taxes. Tax credits are thus far not refundable, so if you owe the IRS less than the amount of your credit, the remaining credit value can be carried over to your next tax bill. The IRS gives you 5 years to use the credit.
If you’d rather have the cash, you can assign (essentially sell) the value of your tax credit to a bank, business, or individual who may buy your credit at a discount. Please consult your tax attorney about this option.
Do You Calculate the 30% Before Local Rebates Or After?
Some customers multiply the 30% by the gross cost of the installed solar thermal system, while others calculate the 30% times the cost after the cost of any state or utility rebate has been subtracted.
So which formula is correct? It depends on whether you’ve bought your solar system as a business or a homeowner, or whether or not you’ve directly received any rebate cash.
For Businesses
- If you are a commercial business, you must calculate the 30% from the gross amount before any state or a utility rebates. However, as a business, you must also report any rebate amount received as income.
- Thus, any rebate money received by the state must be reported and will be taxed at the prevailing rate.
- For example. If your gross solar thermal system cost is $50,000, you will receive a $15,000 tax credit that you can use toward paying your Federal income taxes.
For Homeowners
- If you are a solar homeowner, you must calculate the solar 30% Federal Tax Credit after deducting any State or Utility rebates. Perhaps this sounds unfair, compared to businesses, but wait. Here’s the bonus:
- Residents don’t have to report any State or utility solar rebates as income. Instead, it is viewed as a “reduction” in cost. That’s sort of like acknowledging that your solar system was bought on sale via the local rebates.
- For example, if your solar hot water or solar thermal system cost $5,000 installed, and then you receive a $2,000 rebate, then your “tax basis” would be $3,000. Thus, your Federal tax credit would equal $900 (30% x $3000 = $900.)
- Remember that tax credits are not currently refundable, so if you owe less than $900 to the IRS in this example, the difference can be used toward your next tax bill.
Other things to keep in mind:
- Whether you’re a home or business, you can only claim the 30% Federal Investment Tax Credit for the year that your solar was “placed in service.” In other words, you should claim the tax credit for the 2012 tax year if your solar system was up and running in 2012. If you only put your deposit down in 2012, but the system was installed in February of 2013, then you need to claim the solar tax credit for 2013 tax purposes.
- You must be a tax paying entity to receive the tax credit. Non-profits and government facilities are not eligible. Typically, these organizations take advantage of the tax credit by financing their solar thermal systems through a third party solar power purchase agreement (solar PPA). The solar PPA company then owns the system and can take advantage of the tax credit.
- You may qualify for other state tax credits or incentives.
We hope this information helps, however, please remember that we are not tax advisers, so always consult with your tax expert before applying the above.
