The Internal Revenue Code is full of provisions where expenses for socially desirable items receive favorable income tax treatment. So it is no surprise that considering the cost of fossil fuels, both in terms of money and in pollution, “clean” energy expenditures are held in high esteem by the IRS.
Most taxpayers are aware of various energy tax credits for expenditures on their home, such as new energy saving windows, doors or insulation. However, most of these expenditures only qualify for a 10% tax credit, and also have a lifetime limitation on the total amount of eligible energy improvement expendtiures allowable. On the contrary, expenditures for solar energy property and solar water heating property yield a 30% tax credit with no lifetime restrictions. This tax credit is currently in effect through the end of 2016. The credit cannot exceed the taxpayer’s tax liability, but any credit amount not currently used can be carried over for one year. These solar energy expenditures can be either on your primary residence or your vacation home. The tax credit is claimed in the year that the installation is completed or if you are installing equipment in a brand new home, you claim the credit in the year you move into the home.
There is also a 30% solar tax credit for expenditures on business property, which includes rental properties. This credit is also in effect through the end of 2016. If the business involved is a pass-through entity (S-corporation or partnership), the credit is allocated pro rata to the owners individually to be applied on their respective indivdual income tax returns. There is a complex formula to determine how much o
f the tax credit can be currently used, but any unused tax credit can be carried back for one year and forward for twenty years. The depreciable basis of the solar property is reduced by 50% of the allowable tax credit.
In summary, if you are contemplating installing solar panels on your home, your vacation home, or your rental property, you should strongly consider doing it so that the project is done by the end of 2016, as there is no guarantee that the solar energy tax credit will be extended. In order to qualifyfor the energy tax credit, the property must be located in the U.S.
If you have any questions about residential or business solar energy tax credits, we can help you in this process. Contact us at firstname.lastname@example.org.