It’s tax time! And although there is some confusion about whether or not the new tax cut has gone into effect, a lot of people are pretty happy this time of year. For some people, their tax return gives them the opportunity to pay off some debt, plan a family vacation, or just to splurge on something extravagant for themselves.
But for people who are self-employed, independent contractors, or small business owners, this can be a stressful time. These people are preparing to send a huge check to the IRS.
If you are a W-2 employee and have your taxes taken out of your check every pay period, then you may not understand the struggle. For a large segment of our society, they need to set money aside throughout the year to be able to pay their taxes when tax time comes. Not everyone is the best bookkeeper, so not everyone has done what’s necessary to make sure that they are prepared when it comes time to file their taxes. Fortunately, many people in this situation are smart enough to hire someone to help. A tax professional can help them find deductions and write-offs to help alleviate their tax burden. At FreeVolt USA, we are not tax professionals and do not know all of the ins and outs of taxes, but wedo know energy efficiency and solar. What does one thing have to do with the other?
The solar industry has grown in large part due to a 30% Federal Income Tax Credit. This credit was originally established in 2005 and was set to expire in 2007, but through a series of extensions, it will still be available to homeowners through 2019. A partial credit will still be available through 2021, and then it is scheduled to go away for good. So how does a tax credit work?
Unlike a deduction, which reduces your taxable income, a tax credit actually reduces the amount of tax you owe. Therefore, if you owe $10,000 in taxes, but you have a tax credit of $3,000, then you only owe $7,000. It is a dollar for dollar credit, which most experts agree is better than a deduction. So how does this work with solar?
When you purchase a solar system, whether outright or through financing, you are eligible to receive a 30% Federal Income Tax Credit on the cost of the system. That includes certain finance fees. Therefore if the system costs $30,000, you are eligible for a $9,000 tax credit when you file your taxes for that year. The system needs to be installed, inspected, and in-service before December 31st in order for you to take the tax credit that year, otherwise you will have to take it the following year.
It is a refundable tax credit. That means that if you had taxes taken out of your check, or made prepayments to the IRS, then you can receive that tax credit as part of your refund. If the tax credit exceeds the amount of taxes that you owe, then you can take it over multiple years. But they will not give you a refund that exceeds the amount that you owe in a single year. Some inexperienced or unethical solar professionals may present the tax credit as a tax “rebate,” but that isn’t how it works. If you are eligible for a tax credit of $10,000, but you only owe $5,000 in Federal Income Tax, then you can only use $5,000 worth of your credit. Assuming your income is the same the following year, you can take the rest of the $10,000 at that time.
Some people will not be able to use the tax credit, and therefore should consider whether purchasing a solar system even makes sense or if they should instead look into a lease or a power purchase agreement. People who don’t pay Federal taxes will have no ability to use the tax credit. For example, people who rely solely on Social Security or disability for their income will most likely not be able to utilize the credit. Also, foreign citizens that own land in the United States will probably not be able to use it either. If you aren’t sure whether or not you can use the tax credit, then speak to your tax professional. They can analyze your situation and help you determine whether or not you can. Don’t trust your solar professional when it comes to tax advice!
When financing a solar purchase, it is important to pay attention to the terms with regards to the tax credit. Most financing plans offer a low payment for the first 16 to 18 months in order to allow you to apply for and receive your tax credit. The idea is that you will reinvest that credit into the loan. At the designated month, the loan will re-amortize and your payment for the next 10 to 30 years will be set. If you are unable to pay the amount of the tax credit back into the loan, then your payment may not be as low as you are expecting. Depending on the terms of the loan as well as your individual utility needs, your payment could still be lower than what you pay your utility, even if you decide to pocket the tax credit. And keep this in mind – once the loan re-amortizes the payment will never go up, and eventually, the system will be paid off, leaving you with little to no electric bill. That is something that your electric company can’t compete with.
There are additional tax benefits when financing a solar system using a PACE (Property Assessed Clean Energy) program. This is when the system is financed through your property taxes. The IRS has confirmed that the interest portion of a PACE payment can be treated as a deduction according to the mortgage deductibility guidelines. That means that if your monthly PACE payment is $200, deductions at tax time may bring another $50 back to you, leaving you with a net payment of $150. Your solar consultant may provide you with estimated numbers as to how much you will be able to deduct, but as always, discuss it with your tax professional.
The last point regarding the Federal Income Tax Credit has to do with battery storage. With improving technology, batteries are becoming more popular with homeowners who want some insurance in case their power goes out – which still happens even if they have solar. People have asked whether or not there is a tax credit for batteries. If you purchase the battery as part of a solar system, then the answer is yes. If you purchase the battery on its own, then the answer is no. So if you buy a $30,000 solar system and add a 12,000 battery, you can take a 30% tax credit on $42,000, which would be $12,600, bringing the net cost of your solar plus battery to $29,400. If you bought a $12,000 battery on its own then you would not be eligible for any tax credit.
So, if you are one of those people that are always looking for tax credits, then solar may be a good option for you. Even if you don’t necessarily NEED a tax credit, going solar and taking the credit will benefit you financially. But remember, you need to have the system up and running by the end of the year that you need to take the credit for. In order to do that, you need to sign the documents to start the process by the end of October.
As always, if you have any questions pertaining to your particular situation, feel to reach out to us through our contact page.
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