Commercial vs Residential Solar Tax Incentives: Understanding the Differences
There are two different types of tax incentives available for solar systems, and the one you claim depends on the type of solar system you are planning to install. Both residential and commercial solar systems installed now offer significant tax benefits, but those incentives are going to change in the coming years. We’ll discuss what you need to know to understand tax credits and avoid missing out on incentives that you are eligible for based on the solar system you get.
Current Residential and Commercial Solar Incentives (2020 and 2021)
Right now the tax incentive for residential and commercial solar arrays are the same. If you install a solar system on your home or business in 2020, you can claim 26% of the cost for your system as a tax credit on your federal tax returns. In 2021, that amount will go down to 22%.
For residential customers, the 26% credit is available to offset any taxes that you might otherwise owe so you can significantly reduce your total tax bill to the IRS. If your credit is larger than the amount you owe, you can also roll over the credit to a future year for up to five years to offset your tax bill. So, for example, if you are a homeowner who spends $15,000 on your solar system, you will get a $3,900 tax credit. If you only need to use $1,000 of that now, you can roll over the other $2,900 to use in one or more future years.
Commercial solar tax credits are likely to be much larger because the systems cost a lot more, so the rules on how you can use the commercial solar credit are different from the residential carryover rules. It’s important to examine those closely to make sure you get the full benefit of your tax incentive.
Future Solar Incentives (2022 and beyond)
Starting in 2022, the residential solar tax incentive will disappear entirely. New customers that install a solar system will not be able to claim any federal tax credit, although you may still be able to take advantage of some state or local incentives depending on where you live.
Commercial solar tax incentives starting in 2022 will go down by more than half, from 22% to just 10%. As of right now, the federal governments has indicated that the 10% incentive will remain in place indefinitely, but that may change in the future based on solar prices and adoption rates.