Are Solar Panels Fuel Cell Property?

The paperwork you use to claim a credit on your tax return for installing solar panels on your home is Form 5695. Tax Form 5695 is usually referred to as the Solar Investment Tax Credit Form.

The Internal Revenue Service (IRS) website has a copy of Form 5695 available for download, as well as instructions for filling it out.

The document itself goes into a notion known as “Residential Energy Credits,” which is the IRS’s term for calculating a non-refundable credit for a residential energy-efficient property. However, the credits are only available for approved household energy-efficient renovations in the United States. Residential solar panel systems, solar energy storage, fuel cells, geothermal heat pumps, and tiny wind turbines are all examples of this.

What are the characteristics of a fuel cell?

(1) A quality of a qualified fuel cell (A) Generally speaking The term “qualified fuel cell property” refers to a fuel cell power plant that I uses an electrochemical technique to generate at least 0.5 kilowatts of electricity and (ii) has an electricity-only generation efficiency of better than 30%.

Is there a tax credit for solar panels that have been replaced?

A tax credit for the installation of solar panels on dwellings was provided by the Energy Policy Act of 2005. You can claim 30% of the cost of a solar panel project on your 2019 tax returns thanks to the investment tax credit. If you wait until 2020, the tax credit will only be worth 26% of the total cost. The tax credit will be reduced to 22% from 2022. If collecting the entire 30% credit would result in a $0 tax bill, you can carry over the extra credits to the following year’s tax returns. To claim the credits, you must fill out IRS Form 5695.

How do I deduct the cost of solar panels from my taxes?

The US government grants tax credits for solar-powered systems in an effort to encourage Americans to utilize solar energy. Let’s look at some of the advantages of the solar tax credit and how to apply for it.

Solar tax credit amounts

If you install renewable energy equipment in your house, you may be eligible for a tax credit of up to 30% of the entire cost. The percentage you can claim is determined by when the equipment was installed.

As a credit, you deduct the amount from your tax payment instead of deducting it from your taxable income.

Qualified homes

You must have made energy-saving modifications to your U.S. residence to qualify for the solar credit, which can include:

  • Federal Manufactured Home Construction and Safety Standards-compliant manufactured home

Claiming the solar credit for rental property you own

Solar panels installed on rental properties that you own are not eligible for the residential solar credit. However, you can claim it if you live in the house for part of the year and rent it out while you’re not there.

  • To represent the time you’re not there, you’ll have to lower the credit for a vacation property, whether it’s a rental or not.
  • For example, if you only live there for three months a year, you can only claim 25% of the credit. The 26 percent credit would be $2,600 if the system cost $10,000, and you could claim 25% of that, or $650.

Filing requirements for the solar tax credit

You must include IRS Form 5695 with your tax return to receive the credit. On Part I of the form, you’ll compute the credit and then enter the result on your 1040.

  • If you have a larger credit than income tax payable in 2021say, a $3,000 credit on a $2,500 tax billyou won’t be able to use the credit to obtain money back from the IRS. You can instead carry the credit forward to 2022.
  • You can file an updated return if you didn’t claim the credit the prior year.

The household solar tax credit is currently scheduled to expire at the end of 2023. If you’ve been considering adding solar energy to your home, now is a good time to do so.

What expenses are eligible for the solar tax credit?

The Internal Revenue Code provides a credit to taxpayers who install solar energy equipment to promote investment in solar energy (and other alternative energy sources). Solar panels, as well as related equipment and material installed to generate power for use by a residential or business building, may be eligible for a 30 percent credit.

Section 25D(g) provides a 30 percent credit if the property was placed in service in a residence before January 1, 2020, a 26 percent credit if the property was placed in service after December 31, 2019, but before January 1, 2021, and a 22 percent credit if the property was placed in service after December 31, 2020, but before January 1, 2022. Solar energy equipment in commercial property is eligible for a 30% credit under Section 48(a)(2)(A) if development commences before January 1, 2022.

This credit raises the question of how much of the equipment and materials should be included in the credit calculation. Is it possible for a taxpayer to deduct the entire cost of a new roof when installing solar panels? Is it important whether the roof is in good condition or needs to be repaired?

When you search the internet for answers, as we all do when we’re curious, you’ll get a variety of responses from various professionals and businesses. Some believe you can include the cost of new roofing in the solar energy credit calculation, while others say no. The answer is a little more involved than a simple “yes or no.” An examination of two Code provisions that deal with energy credits, Sec. 25D and Sec. 48, is required to assess the IRS’s likely treatment.

The domestic energy efficient property credit is included in Section 25D. “An amount equivalent to the sum” of “qualifying solar electric property expenses” is “authorized as a credit against the tax imposed… for the taxable year.” (Section 25D(a) also allows for credits for fuel cells, wind energy, and geothermal energy, but this article is about solar energy.) A qualified solar electric property expenditure (QSEPE) is defined as “an expenditure on property that employs solar energy to generate electricity for use in a dwelling unit located in the United States and used as the taxpayer’s residence” (Sec. 25D(d)(2)).

Labor expenditures “assigned to onsite preparation, assembly, or original installation… and for piping or wiring to interconnect such property to the dwelling unit shall be taken into account for purposes of” computing the QSEPE (Section 25D(e)(1)). The QSEPE also includes a category for “solar panels,” which is applied as follows: “No expenditure relating to a solar panel or other property installed as a roof (or portion thereof) shall fail to be treated solely because it constitutes a structural component of the structure on which it is installed” (Sec. 25D(e)(2), emphasis added). Unfortunately, there are no Treasury Regulations or cases to help interpret or define portions of Sec. 25D as they pertain to solar energy.

However, certain IRS guidance is helpful in defining what qualifies as QSEPE. Part of the taxpayer’s request for a decision of whether his expenditures for components of a solar energy system were lawfully includible as a QSEPE was addressed in Letter Ruling 201130003. “Under Section 25D, labor expenditures allocable to the onsite preparation, assembly, or original installation of qualified solar electric property, as well as piping or wiring to interconnect such property to the dwelling unit, are eligible.” Solar panels, solar subpanels, portions of the air conditioning condensing unit, and wiring components, according to the IRS, are all QSEPEs.

The taxpayer asked for a ruling whether “the cost of constructing specific energy storage property to be integrated into other residential solar photovoltaic system equipment will qualify aseligible for the tax credit under 25D” in Letter Ruling 201809003. The IRS determined that a “battery” for storing solar electricity generated by a solar energy system for use in a dwelling unit, as well as a software management tool for monitoring the charging and discharging of solar energy, are legitimately includible costs in calculating the QSEPE amount.

Q-21: If a qualified property is built in or on an existing home or a newly constructed home, a taxpayer may claim a 25D credit. How does the taxpayer determine the cost of the qualified property under Section 25D in the instance of a newly constructed home?

A-21: The taxpayer may obtain a reasonable allocation from the homebuilder or use any other reasonable way to establish the cost of the property that qualifies for 25D.

Q-29: Can I claim the 25D credit for spending on a solar-powered exhaust fan?

A-29: The 25D credit is only available for the component element of a property that genuinely provides electricity for the dwelling unit. Provided a solar panel on a fan provides enough electricity to power the fan for use in a dwelling unit, the cost of the panel component may be eligible for a 25D credit if all of the 25D conditions are met; however, the total cost of the fan is not. Furthermore, 25D(e)(1) expressly enables certain labor expenditures to be considered for determining the credit. Only the labor costs allocable to the qualifying component may be considered when calculating the credit under this section.

The commercial energy credit (Sec. 48(a)(1)) is for “energy property placed in service during the taxable year.” Any “equipment that uses solar energy to generate electricity to… a structure” and “equipment that uses solar energy to illuminate the inside of a structure” (Sec. 48(a)(3), emphasis added) is considered an energy property. “Solar energy property” is defined as “equipment and materials (and parts related to the functioning of such equipment) that use solar energy directly to I generate electricity, (ii) heat or cool a building or structure, or (iii) provide hot water for use within a building or structure” according to Regs. Sec.1.48-9(d)(1) (emphasis added). Section 1.48-9(d)(3) of the Regulations defines electric generation equipment as follows:

Equipment that uses solar energy to generate electricity, as well as storage devices, power conditioning equipment, transfer equipment, and parts linked to the operation of such things, are included in solar energy property. In general, this process entails the conversion of sunlight into electricity using equipment such as solar cells or other collectors. Solar energy property used to create electricity, on the other hand, only covers equipment up to (but not including) the stage when electricity is transmitted or utilised.

Solar energy property also includes “ipes and ducts that are used only to convey energy obtained from solar energy” (Regs. Sec. 1.48-9(d)(4)).

The implementation of the energy credit as it relates to the roof of the construction is explained in Letter Ruling 201523014. The taxpayer wanted to know if a particular “reflective roof” combined with a solar energy system qualifies as Sec. 48 energy property. Special materials and equipment are used to create the reflecting roof, which is meant to reflect sunlight striking the roof. “Sunlight shines through the transparent areas of the panels and reflects back onto the underside of the panels from the surface on which the panels are positioned,” according to the solar panel design. The solar panels can “produce electricity using sunlight reflected from the surface on which the panels rest” since they are constructed in this way.

In its analysis, the IRS refers to Regs. Sec. 1.48-9(k), which defines “incremental cost” as “the excess of the total cost of equipment above the amount that would have been incurred on the equipment if the equipment were not used for qualifying purposes.” The IRS ruled that the reflective roof was “equipment that generates electricity using solar energy.” The IRS, on the other hand, applied the definition of “incremental cost” to the reflective roof, claiming that it is energy property under Sec. 48 “to the extent that the cost of the Reflective Roof exceeds the cost of reroofing Taxpayer’s building with a non-reflective roof that is allowed by local law.”

When it comes to commercial solar energy under Sec. 48, one may reasonably expect the IRS to follow Letter Ruling 201523014 and only allow “incremental costs,” as described in Regs. Sec. 1.48-9(k), to be included in calculating the energy credit when the property gets a new roof and solar panels.

The main issue is how residential property is treated under Section 25D. Some observers claim that the term “installed as a roof” in Sec. 25D(e)(2) provides for a different interpretation than Sec. 48, allowing the cost of a new roof to be factored into the residential energy credit calculation. That, in the author’s judgment, looks to be an extremely aggressive posture, one that the author would not recommend to a client.

It is instructive to go to Sec. 48, its rules, and interpretations for guidance rather than relying on an assumed reading of an undefined language. For the purposes of claiming the tax credit, both Code provisions refer to “solar energy to generate electricity.” There is no definition for that phrase. Letter Ruling 20153014, interpreting Sec. 48 (which uses language similar to Sec. 25D), only allows “incremental costs” of a new roof to be included for purposes of the residential energy tax credit, limiting the amount that can be included only to amounts that exceed the cost of installing a new normal roof. As a result, it’s realistic to expect the IRS to take a similar stance on Sec. 25D, refusing to allow the entire cost of a new roof to be deducted as part of a solar energy upgrade.

When will I be able to claim the solar tax credit?

In general, you can claim a tax credit for expenses related to a new solar PV system that was already installed on the house for the year you moved in (provided the builder did not claim the credit)in other words, you can claim the credit in 2021.

Is it possible to claim the solar tax credit twice?

It’s tax season again, which means it’s time to address all of your burning questions concerning the federal solar tax credit for the fiscal year 2021. Do you have a lot of questions regarding it? Don’t worry, you’ve arrived to the correct location. Let’s get this party started.

Read more in our Guide to the Federal Solar Tax Credit if you have any more questions about the 2022 solar tax credit.

What is the solar tax credit for 2020?

Simply put, the solar tax credit (also known as the ITC) is a federal tax credit worth 26% off the cost of your solar panel installation.

  • You paid cash or took out a loan to get your solar system (leasing or PPA financing cannot claim the tax credit).

How does the federal solar tax credit work?

The federal solar tax credit is a 26% credit that can be applied to your federal taxes in the year that you install solar panels on your home.

Yes, as long as your solar panel installation is purchased rather than leased. The tax credit covers both the cost of the equipment and the cost of installation. The tax credit can be used to offset your federal income tax liability and can be carried forward for up to five years.

How much is the federal tax credit for solar panels?

The federal solar tax credit is presently at 26 percent, the highest rate possible. When it’s time to file your taxes, you’ll be able to save a lot of money. For another two years, the federal solar tax credit of 26% offers a significant savings opportunity. The current rate is due to freshly enacted legislation that eliminated the tax credit’s previously specified timetable.

Instead of expiring at the end of 2020, the 26% solar tax credit will now be renewed in 2021 and extended until 2022. The tax credit will be reduced to 22% in 2023 after 2022.

This is a promising sign of things to come, as further legislation is expected to be introduced in the future years to encourage more houses to install clean, renewable energy systems.

Does the solar tax credit include battery storage?

Home battery storage, such as the Tesla Powerwall, is eligible for the federal solar tax credit. Install a backup battery like the Powerwall to get even more value out of your home’s solar system while the federal government’s 26 percent tax credit is still available. When it comes to the federal tax credit and solar batteries, one thing to keep in mind is that you may only get the credit if the energy used to charge the battery comes entirely from solar and not from the electric company’s grid.

Homeowners who already have a solar system, take note! If you elect to add a battery to your system, you may be eligible for this federal tax credit. The IRS explained in a 2018 private opinion that the tax credit can still be applied to a battery if it’s installed within a year of your solar system.

Can I get a tax credit for leasing solar panels?

Unfortunately, the solar tax credit is only available if you purchase your solar panel system. This can be done with cash or a solar loan. You cannot earn the tax credit if you sign a lease or PPA with a solar contractor because you are not the owner of the solar panel installation.

Do I qualify for the solar tax credit?

  • Between January 1, 2006, and December 31, 2021, your solar system was ‘put in service.’
  • The solar system is installed in a home in the United States (but not necessarily your primary residence).
  • The solar system is brand new or has never been used before. Only the “original installation” of solar equipment is eligible for the tax credit.
  • If you got rebates or subsidies for installing solar panels, you must compute the entire cost after applying the rebates, as rebates are intended to lower your overall cost. For example, if your solar panels cost $20,000 but you received a $2,000 refund from your utility company, your total cost would be $18,000, which you would report on your taxes.
  • You don’t need to do any extra arithmetic for your federal solar tax credit filing if you have a state solar tax credit in addition to the federal solar tax credit. The total amount you paid is used to compute both state and federal tax credits.

Can you claim solar tax credit twice?

If you own a house, you cannot claim the solar tax credit twice; however, you can carry over any unused portion of the credit to the following tax year for up to five years. Note that you may be eligible if you own many solar-powered homes. In this scenario, speak with a tax specialist to learn more.

What if the solar tax credit exceeds my tax liability?

This is a nonrefundable tax credit, which means that if the solar tax credit exceeds your tax liability, you will not receive a refund. Similar to the previous question, however you can carry over any unused tax credit for up to five years.

Can I use the solar tax credit against the alternative minimum tax?

Yes. The credit can be applied to either the federal income tax or the alternative minimum tax.

Is the solar tax credit going away?

Yes. After 2023, the solar tax credit will be totally phased off. And 2022 is the last year to get the federal solar tax credit of 26%. The solar investment tax credit was previously extended in 2015, but that window of opportunity is soon closing. The table below shows how long and how much longer the tax credit is available.

Bonus! How to claim the solar tax credit in 2021.

However, please keep in mind that we are not tax advisors. We are not providing tax advice; rather, we are providing a sample of how to fill out a form using a fake example. Before filing, please seek advice from a tax professional.

You’ll need your solar installation receipts, the IRS Form 1040 for 2020, the IRS Form 5695 for 2020, and a calculator to file your taxes. You can begin working on Form 1040 once you have all of these materials. You’ll also need to complete a 1040 Schedule 3 Form.

Qualified solar electric property charges are listed on line 1 of the form. In that line, you’ll input the total cost of your solar panel system. The total price includes the installation fee. Continue to Line 5 of the form’s instructions.

You will add the total amount from Lines 1 through 4 on Line 5. Go to Line 6 now.

Add the total amount of credit from Lines 6, 11, and 12 to Line 13. Simply write the number from Line 6 here if you didn’t need to fill Lines 7 through 12.

The Residential Energy Efficient Property Credit Limit Worksheet is included with Line 14. Stick to the directions on the worksheet.

Subtract the amount on Line 2 from the number on Line 1 on Line 3 of the Worksheet. Line 14 of Form 5695 will be filled in with the amount on Line 3 of the worksheet form.

You will enter the smaller number of Lines 13 and 14 on Line 15 of Form 5695. For example, if Line 13 listed 9,000 and Line 14 listed 4,500, you would put 4,500 on this line. This is the amount you put on both your Schedule 3 form and your 1040.

Look at Lines 13 and 15 for Line 16. Subtract Line 15 from Line 13 if the number on Line 15 is smaller than the number on Line 13. If you had 9,000 on Line 13 and 4,500 on Line 15, you would remove 4,500 from 9,000 to get 4,500. Line 16 is where you’d place the number.

If Line 16 is filled, the number represents any carryover tax credit you may have from your solar panels. The credit is carried forward to the following tax year, where it can be claimed again.

We’ll use a hypothetical character named Mr. Jones to demonstrate how this will all play out step by step.

  • Mr. Jones spent $30,000 on a solar panel system that he bought and installed in 2020.
  • He multiplies 30,000 by 26 percent, or 0.26, to get 7,800 on Line 6. As a result, he enters 7,800 on Line 6.
  • He adds Lines 6, 11, and 12 to Line 13, but only Line 6 (7,800) was filled. Line 13 has a value of 7,800.
  • He continues through the worksheet on Line 14 and comes up with the figure 4,500, which he enters on that line.
  • He enters 4,500 on Line 15 because it was the smaller number on Lines 13 and 14. Line 16 has 4,500 as well.

Mr. Jones claimed a total of $7,800 in tax credits, of which $4,500 was used to pay his taxes that year. The remaining $3,300 is rolled over for the following year, when he can use it to help pay his taxes once more.

Contact the Internal Revenue Service at (800) 829-1040 or 1111 Constitution Avenue, N.W., Washington, DC 20224.

Disclaimer: The information on this page is for informational purposes only and does not represent professional tax advice or other professional financial advice. When making purchasing, investment, or tax decisions, or when completing other legally binding agreements, it should not be utilized as the sole source of information.