Tax Day is just around the corner, and with it comes an opportunity to discuss one of the most impactful financial benefits of a solar installation – the Solar Investment Tax Credit. Often referred to as simply the solar tax credit, this federal incentive is the biggest and best known of all the impacts of an investment in home solar generation. There are of course other meaningful clean energy incentives at the federal and state level, and solar itself has inherent value that make it a powerful investment even without all of these extra bonuses.
However, we are in favor of any effort to make solar energy more accessible to more people, and the solar tax credit is certainly an important component of that effort. As we celebrate (or perhaps dread) this year’s Tax Day, let’s take a look at how the tax credit can help you have a better time filling out your taxes, and consider potential changes that might be growing on the horizon.
Those who have installed a solar system in the previous year are likely headed into tax season 2025 with a little more pep in their step than the rest of us, and with good reason. After all, they are about to benefit from the 30% tax credit that comes with any new installation! This is to say nothing of the additional credits and incentives that come with components which commonly surround a solar system – like battery and EV charging benefits. That 30% credit is a sizable chunk of change, amounting to an average of $7,500 in value.
Now, given how personal tax liability works, it’s likely that most people won’t be able to leverage the full 30% credit on their taxes in one year. However, that is no problem at all – the remainder of your credit can be rolled forward to subsequent years, allowing you to ultimately enjoy the full force of your savings! There are even financing and leasing options which allow you to access the value of the tax credit up front, should that be something you are interested in pursuing. Whatever you choose, it’s clear that investing in solar is a great way to make your next Tax Day better.
Speaking of the next Tax Day, we wanted to take a moment to discuss some information surrounding potential changes to the solar tax credit. The current administration has indicated a potential interest in making changes to the Inflation Reduction Act, which included a large swathe of green energy incentives and which also revitalized the solar tax credit. No definitive plans have yet been made, but it is worth evaluating the current political climate to get a sense of when you should act as a consumer in a shifting market.
From our research, the chance that elements of the Inflation Reduction Act are changed is very high, but the likelihood that the 30% tax credit disappears overnight is very low. The Inflation Reduction Act is a law, and as such any changes to the act would require congressional approval. It is much more likely that the administration would push for elements of the law to be adjusted, which could be accomplished by folding the motion into a Budget Reconciliation Process, which has a lower vote threshold than the one required for repealing a law.
Beyond that, the IRS tends to favor changes to the tax policy that allow for advanced notice, so barring any unprecedented behavior, any adjustment to the value or longevity of the solar tax credit would likely be structured so as to give people time to prepare for the changes. This time period is often defined as the end of the current year, though that is more of an act of convenience than a hard rule. At the end of the day, there remains some uncertainty as to the what, when, and how of any changes to the tax credit, but all likelihoods point to potential changes taking effect at the end of the year. The bottom line is this: if you’re interested in solar and the current incentives available for it, this year is a good time to make the switch.
Looking Back: Tax Day and NEM
This year, Tax Day falls on April 15th, which is an interesting coincidence for the solar industry as we consider the possibility of change for the current federal incentives. This year marks the 2 year anniversary of the policy change to Net Energy Metering, and the switch from NEM 2 to NEM 3. At the time, the rule was that contracts submitted before a certain date would qualify for the previous agreement, while those which were submitted after the deadline would instead qualify for the new agreement. There was an unprecedented rush on solar installers during that April, as people surged to get their projects in under the wire, spurred by the knowledge that they were securing a potent financial benefit for themselves.
However, it has recently come out that California’s governor, Gavin Newsom, is considering a proposal via the CPUC to break the existing NEM 2 agreements which are still active, and to move everyone onto the existing agreement, NEM 3. In a move that bears striking resemblance to anticipated changes to the existing solar tax credit, the government is considering breaking their agreement with the people. Our problem with this move is twofold – first, every solar system is a contribution to California’s shared green energy goals, and those contributions should be respected for the effort and investment they required. Second, every solar system which operates under NEM 2 does so because of an agreement which incentivized people to install solar, and to break that agreement would be disrespectful to those who made the right choice two years ago.
All of this, the proposed changes to Net Metering and the potential changes to the tax credit, serves to highlight the importance of acting before changes are made to the current solar incentives. The people who are on NEM 2 only have a case because they were able to get in before the incentive changed in the first place. Even if the CPUC is considering ways to break that agreement, the people who invested are in a better position today than they would have been, given the savings they’ve already enjoyed, and the collective impact that breaking their contracts would have. This Tax Day, remember that you could be saving big with the solar tax credit, and don’t forget that the same credit could look a lot different next year. If you want to prepare for the next Tax Day, our representatives can help you make the switch.
