Tax Credit for Solar Panels: What Is it and How Does it Work?

What Is the Solar Panel Tax Credit?
The solar panel tax credits are government-run tax incentives homeowners and businesses can receive for installing solar panels. These federal incentives are officially known as investment tax credits (ITCs) for homeowners and provide a dollar-for-dollar reduction in your income taxes owed. Business owners can choose the ITC or a production tax credit (PTC) per solar panel installation location.

Solar Investment Tax Credit for Homeowners
Let’s start with the solar panel ITC. Homeowners can claim up to 30% of the cost to install solar panels on their homes as a tax credit through 2032. Unless Congress renews the program, the maximum credit decreases to 26% in 2033. It decreases again to 22% in 2034 and then expires at the start of 2035.

This credit has no cap, so it’s 100% based on the cost of the photovoltaic (PV) panel system you install. For example, if the solar system costs $30,000 in 2024, you can claim a $9,000 credit on your income taxes.

Is this credit refundable? Yes and no.

It is not directly refundable, as it’s limited by your tax liabilities for the year you claim it. So, if you only owed $5,000 in taxes that year, you can only claim $5,000 in credits. However, with your tax liability going to $0 for that year, you have a good chance of receiving a refund for all income taxes you paid that year.

On top of this, you can spread the tax credit over multiple years. For example, if you are eligible for up to a $9,000 tax credit and only use $5,000 in the first year, you can use the remaining $4,000 in the following year.
Businesses and homeowners can enjoy federal tax credits on solar panels, though they differ slightly in amount, qualifications, and time frame.
Virtually any taxpayer can qualify for the tax credit on solar panels regardless of income level.
The residential solar panel tax credits start phasing out in 2033 and reach zero at the start of 2035, so now’s the time to act.
Installing solar panels on your home or business comes with a wide range of benefits. The most noticeable of these benefits is the savings you’ll see on your monthly electric bill, but you’ll also reduce your carbon footprint and potentially increase your home or business’ value.

As if those advantages weren’t incentive enough to purchase solar panels, you can also enjoy other financial incentives that help offset solar panel installation costs. One such incentive is the solar panel tax credit.

Below, we’ll explore the solar panel tax credit and cover what it is, how to qualify for it, and how to maximize your savings. We’ll also help guide you through the tax credit application process and discuss the future of solar panel incentives.
Solar Investment Tax Credit for Business Owners
When businesses install solar photovoltaic panels, they get very similar tax credits from their version of the solar ITC. What differs are the credit amounts and how far into the future the program lasts.

Through 2033, businesses can get up to a 30% full-rate tax credit for the tax year the company installed the solar panels. After 2033, things become more fluid, as the program phaseout is based on a soft expiration date of 2036. However, the expiration also depends on when the Treasury Secretary deems we’ve achieved a 75% reduction in annual greenhouse gas emissions. This date of reaching a 75% reduction is called the “Applicable year.”

If a business installs a solar panel system in 2034 or two years after the applicable year, whichever is later, it receives up to a 22.5% full-rate tax credit. If they install one in 2035 or three years after the applicable year, whichever is later, it receives up to a 15% full-rate tax credit. Without Congressional renewal, the plan expires at the start of 2036.

The business only receives the full rate if it meets specific labor requirements. These change yearly, but the basics are:

All construction, alteration, and repair wages for the first five years of the project for the ITC must at least meet the area’s prevailing rates.
An apprentice must perform a certain percentage of the construction labor hours for the project.
If the business fails to meet these requirements, it receives the base-rate tax credit. The base-rate credit has the same time frame terms as the full rate, but the percentages fall to 6%, 4.5%, and 3%.

Potential Bonuses in the Business Solar ITC
The business solar ITC is also subject to various rules that can increase and decrease the tax credit, including domestic content, energy community, and low-income bonuses. Let’s review this complex web of bonuses.

We’ll start with the domestic content bonus. To meet this bonus, the business must:

Use only structural steel and iron produced in the U.S.
Have a specific percentage of the total cost of manufactured products produced, manufactured, or mined in the U.S. The percentages are 40% for all projects beginning before 2025, 45% for all projects starting in 2025, 50% for all projects starting in 2026, and 55% for all projects starting after 2026.
Businesses can also get an energy community bonus for building their solar project on specific sites. To qualify for the energy community bonus, the business must build in an area that:

Has been contaminated by the presence of pollutant, hazardous substances, or other contaminants
Has 0.17% or more direct employment or 25% or more local tax revenues related to extracting, processing, transporting, or storing coal, oil, or natural gas. The area must also have an unemployment rate at or above the national average for the previous year
Has a census tract showing a coal mine closed after 1999 or the retirement of a coal-fired electric plant after 2009
If the business meets either the domestic content bonus or energy community bonus, it receives a tax credit bonus of:

10% for projects started by 2033; 2% if the business fails to meet the labor requirements
7.5% for projects started in 2034 or two years after the applicable year; 1.5% if the business fails to meet the labor requirements
5% for projects started in 2035 or three years after the applicable year; 1% if the business fails to meet the labor requirements
Businesses can also qualify for two low-income bonuses. They can receive a 10% tax credit bonus for building their solar projects with under 5 megawatts (mW) of power in a low-income community or on Native American land. Alternatively, they can get a 20% bonus for building a sub-5-mW solar project classified as a “qualified low-income residential building project” or a “qualified low-income economic benefit project.”