What Is The Irs Incentive For Solar In 2023?

Solar energy has seen rapid growth in recent years as both homeowners and businesses seek ways to lower electricity costs and reduce their environmental impact. A number of federal tax incentives make going solar even more appealing by lowering the cost and enabling faster returns on investment. This article will provide an overview of the main IRS tax incentives available in 2023 for residential and commercial solar installations, as well as other important benefits that factor into the decision to go solar. With the right incentives, solar can be an affordable and sustainable power source.

Residential Solar Tax Credit

The residential solar tax credit is a federal income tax credit that allows homeowners to deduct a percentage of the cost of installing a solar photovoltaic system on their home. For systems installed in 2023, the tax credit is worth 30% of the total system cost, with no upper limit. This means homeowners can get back up to 30% of what they spent on purchasing and installing solar panels as a dollar-for-dollar reduction in their federal income taxes.

To qualify for the full 30% tax credit in 2023, the solar PV system must be installed on the taxpayer’s primary residence located in the United States. Both the home and solar system must be owned by the taxpayer claiming the credit. Renters and secondary homeowners cannot claim the residential solar tax credit. There are no income limits to qualify for the credit. However, the tax credit is non-refundable, meaning it can only be used to offset existing tax liability. Unused credits can be carried forward to future tax years.

The residential solar tax credit originally offered homeowners a credit equal to 30% of qualified solar expenses through 2019. The credit was scheduled to begin phasing down to 26% in 2020, 22% in 2021, and then permanantly set at 10% starting in 2022. However, changes in 2022 legislation extended the 30% credit percentage through 2032 with no phase down. This makes 2023 an excellent time for homeowners to install solar and maximize savings.

Commercial Solar Tax Credit

The federal government offers a tax credit known as the Investment Tax Credit (ITC) to encourage businesses to invest in solar energy systems. This tax credit allows commercial, industrial, utility, and agricultural sectors to deduct 26% of the cost of installing a solar energy system from their federal taxes.

The ITC applies to both residential and commercial solar installations. For a commercial solar system, the tax credit can be claimed on equipment and labor costs for purchase and installation. Businesses that lease their solar energy systems can also qualify for the ITC. The lessor claims the credit.

There is no cap on the size of the commercial solar system that can qualify for the 26% ITC. All solar energy technologies are eligible, including solar photovoltaic (PV), solar water heating, solar space heating and cooling, and solar process heat. The ITC can be combined with additional state/local/utility incentives.

The 26% commercial ITC is scheduled to decrease to 22% in 2023 before expiring completely in 2024. As a result, 2023 presents a good opportunity for businesses to maximize savings by installing a solar energy system.

Depreciation Options

Businesses that install solar panels may be eligible for accelerated depreciation, allowing them to deduct a large portion of the system cost over a shorter time period. The most common method is the Modified Accelerated Cost Recovery System (MACRS), which allows businesses to deduct 85% of a commercial solar system over a 5-year timeline. This can greatly offset the upfront cost of a solar installation.

Under MACRS, solar projects are classified as 5-year property. The system cost can be depreciated as follows:

• Year 1 – 20% depreciation
• Year 2 – 32% depreciation
• Year 3 – 19.2% depreciation
• Year 4 – 11.52% depreciation
• Year 5 – 11.52% depreciation

The remaining equipment value after five years can continue to be depreciated at a slower rate. This accelerated timeline allows businesses to realize greater tax savings in a shorter period, providing a strong financial incentive for solar projects.

Solar Panel Exemptions

Many states and municipalities offer property tax exemptions or exclusions for the value added by solar panel systems. For example, in California, the added value of a solar system is excluded when assessing property taxes. Some states like Florida and Arizona exempt a certain percentage (up to 100%) of the tax assessment. These exemptions lower costs for homeowners by reducing annual property tax obligations.

Solar customers can also benefit from sales tax exemptions on solar panel equipment and installation in certain states. For example, California and New York offer sales tax exemptions. Some states even allow exemptions from sales taxes on electricity generated from solar panels. This further lowers the lifetime costs of going solar for homeowners and businesses.

Solar system owners may also qualify for special zoning allowances or permitting perks from local governments. For instance, some cities allow solar installations in historic districts where other types of exterior construction may not be allowed. Streamlined permitting processes are another common solar incentive. Overall, federal, state and local governments offer various exemptions and non-tax incentives to encourage solar adoption.

State/Local Incentives

In addition to federal solar incentives offered by the IRS, many states and local jurisdictions offer their own tax credits, rebates, and other incentives to encourage homeowners and businesses to go solar. These can make installing solar panels even more affordable.

For example, some states like California offer an additional state income tax credit on top of the federal credit. Others like New York provide cash rebates per installed kilowatt of solar capacity. Many utilities and municipalities also offer solar rebates, credits, and other incentives within their service areas. These are offered independently of federal programs.

The availability, amounts, and eligibility requirements for state/local solar incentives vary widely across different parts of the country. Some states like Arizona and Nevada have very few incentives left, while others like New Jersey and Massachusetts are still very generous. Homeowners interested in solar should research what’s offered for their specific location.

Databases like the DSIRE can help people find state/local solar incentives available based on their address. Working with a knowledgeable local solar installer is also a great way to learn about what incentives can be leveraged to maximize savings. Taking advantage of federal, state, and local incentives together can cover 30-50%+ of the total costs in some cases.

Non-Tax Incentives

In addition to federal tax incentives, there are other non-tax incentives available for residential and commercial solar installations. Many state and local governments offer rebates or other incentives to promote renewable energy.

Popular non-tax solar incentives include:

• State rebates – Many states offer upfront rebates when installing a solar system. Amounts vary by state and utility provider.
• Renewable Energy Credits (RECs) – Homeowners receive credits for the renewable energy their system generates. RECs can be sold or traded.
• Net metering – Customers receive credit or payment for excess energy fed back into the grid. This offsets the cost of energy used from the grid.
• Low-interest loans – Some states sponsor low-interest loan programs for installing renewable energy systems.
• Property tax exemptions – Certain locales offer exemptions from property tax increases related to solar installations.
• Feed-in tariffs – Utilities purchase renewable energy fed into the grid at above-market rates to incentivize adoption.

Researching available non-tax incentives can significantly reduce the overall cost of going solar for homeowners and businesses. Many solar installers and nonprofits provide guides to help identify opportunities. Non-tax incentives combined with federal tax credits make solar even more affordable.

Cost Savings

Going solar provides significant long-term cost savings for homeowners and businesses. According to the Solar Energy Industries Association, the average residential solar system in the U.S. pays for itself within 8 years through electricity bill savings. After this payback period, homeowners continue benefiting from free electricity for an additional 15-25 years, the typical lifespan of a solar panel system.

Commercial solar systems also provide excellent returns, with payback periods ranging from 3-7 years on average. Once the system pays for itself, businesses enjoy 20+ years of free electricity from the sun. There are also tax incentives and accelerated depreciation benefits that further reduce the payback period for commercial solar projects.

One analysis by the Lawrence Berkeley National Lab found that rooftop solar panels lower a household’s energy bills by an average of $1,050 per year. Over the 25 year lifespan, that equates to over $26,000 in savings. With utility rates continuing to rise across the U.S., solar savings will likely grow over time as well.

In addition to direct energy savings, going solar increases a property’s value by about 4% on average, according to the Lawrence Berkeley study. This appreciated home value further adds to the return on investment from installing solar panels.

Environmental Benefits

Going solar provides numerous environmental advantages compared to traditional energy sources like coal and natural gas. By installing solar panels, homeowners and businesses generate clean, renewable electricity without emitting greenhouse gases or other pollutants. According to the EPA, each kilowatt-hour of electricity produced by a residential solar panel system eliminates about 1.5 pounds of carbon dioxide emissions. Over 20 years, an average 6 kW solar array can prevent nearly 200,000 pounds of greenhouse gases from entering the atmosphere. That’s equivalent to planting over 4,000 trees or removing 44 cars from the road. Beyond curbing emissions, solar energy reduces reliance on finite fossil fuels, conserves water at large utility power plants, and helps create cleaner air and water for local communities. With solar incentives lowering costs, it’s easier than ever for homeowners and businesses to make the switch to solar and reap the environmental rewards.

Conclusion

In summary, there are several key incentives for installing solar panels in 2023. The federal solar tax credit allows homeowners to deduct 26% of installation costs from their taxes through 2032. Businesses can deduct 30% of costs through 2032 via the Commercial ITC. Additional savings come from accelerated depreciation options, property tax exemptions, and state/local rebates. Going solar also provides long-term savings on electricity bills and environmental benefits. The initial investment in a solar system will pay off over time through these ongoing incentives and cost reductions. With solar affordability and incentives reaching record levels, now is an excellent time for homes and businesses to go solar and start benefiting.