Explanation of Key Concepts

Filing Status

Filing status is a category that defines the type of tax return form a taxpayer must use when filing their taxes. Filing status is closely tied to marital status. Read more here -https://www.investopedia.com/terms/f/filingstatus.asp.

Standard Deduction

The 2023 standard deduction is $13,850 for single filers, $27,700 for joint filers or $20,800 for heads of household,. Read more here -https://www.nerdwallet.com/article/taxes/standard-deduction.

The Federal Solar ITC

The first available incentive is the Federal ITC (Investment Tax Credit) which in 2023 is a 30% credit on the full purchase price of your system. Based on a purchase price of $25,000, this would be a $7,500 credit. This is filed on form 5695 or 3468 depending on your situation. Please keep in mind this is a Federal Tax Credit. As tax credit, it is a dollar for dollar exchange against your tax liability. It is not a rebate. Meaning if you have no Federal Tax Liability, this credit will not benefit you. You will only get a refund from the IRS for the amount that you have paid in. If you were to owe the IRS, the credit will go against what you owe. The good news is that if you are not able to use the full amount of the credit in a single year, the remainder carries forward to the next year. There is no expiration, and it can be carried forward as many years as necessary until it's used in full. The date your eligibility to claim this credit is based on is when the panels completed installation. Meaning if you list 12/31/2022 or earlier as when the installation was completed, then you are eligible to take the credit for the 2022 tax year. However, if you list 01/01/23 or later as completion date, then you will not be eligible to claim the credit until the 2023 tax year.

MACRS Incentive

The second available incentive is the Modified Accelerated Cost Recovery System (MACRS). This is the largest available incentive besides the original Federal Solar ITC. The MACRS incentive will allow you to deduct 85% of the full purchase price of the system. Based on a $25,000 system, this would take an additional $21,250 and claim it as 100% deductible. This is filed on form 4562. Being a deduction, the amount this benefits you will depend upon your personal tax bracket. The Federal Tax brackets range from approximately 12-37%. State Tax brackets range from approximately 0-14%. The deduction goes against both. Using an example of a 25% tax bracket, that would result in a total benefit of $5,312 on top of the 30% Federal ITC. This incentive is typically claimed over a 5 year schedule, where you claim 10% of the deduction in year 1, 20% of the deduction in years 2-5, and the final 10% on your 6th filing. However, it can be claimed over short or longer periods. In some cases, you can claim and receive the entire benefit in one tax year. You must be Net Metered or selling SRECs (Solar Renewable Energy Certificates) or TRECs (Transition Renewable Energy Certificates) to qualify for this incentive. The date of your eligibility to claim this incentive is based on is when your system went live and started to generate power. This is often referred to as your Net Meter or PTO date. Meaning if you list your Net Meter date as 12/31/2022 or earlier then you are eligible to claim the deduction for the 2022 tax year. However, if you list 01/01/23 or later as the Net Meter date then you will not be eligible to claim the deduction until the 2023 tax year. Straddle Effect

Be aware that it is common for a solar panel system to be installed in one year, and not be turned on until the following year. You don't lose any incentives due to this, it simply means you will break the incentives up over the two tax years. Depending on your personal tax situation, this can actually end up being advantageous as many people have little to no tax liability left over after claiming the large Federal ITC for the first year anyway.

Interest and Finance Fees

The third available incentive is the ability to deduct the interest and finance fees if you have a loan for the panels. You may also include other expenses with this such as net metering fees, interconnection fees, maintenance fees, etc. You will charge any revenue that you may have received from the utility company in the form of cash or credit for excess energy production against these expenses. This is all filed together on form Schedule C. The Schedule C will include the full amount you were compensated for all excess kWh produced, and also include all eligible expenses you incurred. Interest is typically the largest additional expense you will pay. As an example, $25,000 financed at 3.99% is going to be nearly $1,000 a year that you are paying in interest which can be made up to 100% tax deductible. State Tax Benefit As a side effect of claiming the above Federal Incentives, you will be lowering your Adjusted Gross Income (AGI). This will automatically lower the AGI for your State Tax filing and depending on your state tax bracket can result in hundreds or even thousands of dollars in additional savings.

Total Savings:

Using the above example, you would qualify for the following: Credits: Federal $7,500. If you are not receiving this amount back in full the first year, it is either because you did not pay in enough throughout the year, or you owed the IRS and it was charged against that. Any remainder you don't claim this year will carry forward. Deductions: MACRS Deduction for $21,250 and Interest over 10 years at $10,000 totaling $31,250. The amount this benefits you will be based on your tax bracket, but just like the credits any amount you don't use will carry forward to the next taxable year. Using a 25% tax bracket as an example, this would mean $7,812 being owed to you.

Following this example, using a 25% tax bracket on a $25,000 purchase price, you would be looking at roughly $15,312 in incentives owed to you. This would represent over 60% of the full purchase price being saved. Your final amounts may be higher, or lower, depending upon your personal tax situation. On top of the amounts listed above, assuming you are in a state with income tax, you will have the additional benefit of the savings on state taxes from a lowered AGI. While you will need to report the income from the solar panel equipment for the life of the system, you can also continue to deduct net metering fees, cleaning and maintenance costs, interest and finance fees paid and more expenses each year for the life of the system or as long as you are paying them. You can see now how over time you could be writing off a significant portion of the purchase price of your solar system through these available tax incentives. Definitely talk to your Tax Advisor about these benefits when you file taxes.