federal incentives for Solar Energy

In 1997 the Department of Energy (DOE) announced an initiative called the Million Solar Roofs Initiative or MSRI.  It was intended to encourage the installation of solar energy systems on one million rooftops by 2010.  Unfortunately this endeavor does not provide any actual funds for solar energy directly to consumers but instead gives the DOE the charge of coordinating efforts of various federal, state and local industry groups towards that goal.  While a worthwhile goal, its impact overall on solar energy usage in the United States has been rather limited. 

However, beginning in 2005 congress provided much stronger support by passing new tax credits for solar energy, the biggest set of incentives on solar energy since the Carter administration.  These energy incentives came from the Energy Policy Act (H.R. 6, Sec. 1335).  They establish a 30% tax credit up to $2,000 for the purchase and installation of residential solar electric and solar water heating. An individual can take both a 30% credit up to the $2,000 cap for a photovoltaic system and a 30% credit up to a separate $2,000 cap for a solar water heating system. A 30% tax credit up to $500 per 0.5 kilowatt (kW) is also available for fuels cells. These tax credits were originally set to expire at the end of 2007 but thankfully were extended through December 31, 2008, by Section 206 of the Tax Relief and Health Care Act of 2006 (H.R. 6111).

There are some requirements for claiming these tax credits. The tax credits for solar water heating strictly apply to home hot water heating systems. They cannot be used to pay for solar systems to heat swimming pools or hot tubs.  If you want to get tax credit on a solar hot water heating system you must select a system which is certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. This requirement is intended to ensure that homeowners don't get taken by some of the shady operators that suddenly entered the market after the original Carter administration tax incentives became available.

The size of the tax credit is calculated based on the individual’s expenditures and excludes subsidized energy financing, which is defined as "financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy."

The details of the tax credits can be complicated and you should consult with a tax professional regarding how to calculate the potential tax savings before proceeding with any work. If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. Expenditures include labor costs for the onsite preparation, assembly, or original installation of the system and for piping or wiring to interconnect the system to the dwelling.

 To be eligible for the credit, a system must be "placed in service" or activated on or after January 1, 2006, and on or before December 31, 2008. So unless congress renews the incentives you only have until the end of next year to take advantage of these credits. Expenditures with respect to the equipment are treated as made when the installation is completed. If the installation is on a new home, the "placed in service" date is the date of occupancy by the homeowner