The Top 5 California Solar Tax Credits for Homeowners
No matter your California location, a few solar benefits are available to you, from PACE and property tax exemptions for PV systems to NEM and the federal ITC (investment tax credit)—an immense solar-based finance advantage.
With California's ample sunshine and ambitious climate change objectives, making the switch to solar energy has never been easier.
California Tax-Based Solar Incentives
Here are some of the California tax-based solar incentives to be aware of:
1. Property-Assessed Clean Energy (PACE)
Unleash the power of your home's energy with PACE, otherwise known as HERO (Home Energy Renovation Opportunity). This financing option grants property owners access to qualified solar energy and energy efficiency projects through their property taxes.
Your local or state government will pay for the project up front, and you will pay it back over the next 20 years through a higher tax bill. Take advantage of this fantastic program, now available in more than 20 states, including California!
2. Property Tax Exclusion for Solar Energy Systems
When you buy or sell a home, when there is new construction, or when there are significant renovations, your property may be reassessed in California at its full market value.
Fortunately for California homeowners who install solar panels on their property, Section 73 of the Revenue and Taxation Code excludes increased taxes due to these installations. This tax exemption was set to expire in 2016 but has now been extended until January 1st, 2025!
3. Net Energy Metering
After numerous years of intense consideration, postponements, and adaptations, the much-anticipated Net Energy Metering 3.0 was finalized on December 15, 2022. But how do these modifications affect Californians?
Firstly, NEM is a billing system between utilities and homeowners who use solar energy that rewards them for any extra power they generate. This extra energy feeds back into the grid when sunlight is abundant, generating credits that can cover their electricity usage from the grid once there isn't enough sunshine.
Net metering policies have traditionally been one-for-one, meaning that the cost of every kilowatt-hour (kWh) produced is equal to what you get for a kWh taken from the grid.
Using this formula, solar owners whose systems make the same amount of electricity as their homes use can usually replace their utility bills with a cheaper monthly payment for their solar equipment. The 25-year warranty on these panels means that you can save hundreds or even thousands of dollars on energy costs over that time.
What is NEM 3.0?
On December 15, 2022, the California Public Utilities Commission (CPUC) approved and implemented NEM 3.0. This is a new version of the net energy metering policy that applies to utility users in the service areas of California's three major investor-owned utilities (IOUs):
- Pacific Gas & Electric (PG&E)
- Southern California Edison (SCE)
- San Diego Gas & Electric (SDG&E)
It's critical to remember that NEM 3.0 does not apply retroactively, which means solar panel systems set up under either NEM 1 or 2 will be subject to their current policy for twenty years from the date of PTO (Permission To Operate) issuance.
If you want to take advantage of the more advantageous terms under NEM 2.0, you must submit a comprehensive interconnection application before April 13, 2023, when NEM 3.0 goes into effect.
What does NEM 3.0 mean for solar in California?
The new rate structure will significantly diminish solar energy's value. There are five basic takeaways for California IOU customers regarding NEM 3.0:
- Solar electricity is now subject to a considerable decrease in the value of net metering.
- You won't have to pay additional taxes or fees, often called "solar taxes"
- Integrating solar and energy storage will be even more advantageous under NEM 3.0, providing greater consumer returns than ever before
- Solar customers that submit an interconnection application before April 13, 2023, can be grandfathered into NEM 2.0 for 20 years
- Solar owners that are grandfathered into NEM 2.0 will be able to add battery storage later and remain on NEM 2.0
4. Solar for Affordable Housing
The Single-Family Affordable Solar Housing (SASH) program in California gives low-income single-family homeowners in the service areas of PG&E, SCE, and SDG&E a one-time incentive of $3/Watt!
This fantastic offer is administered by GRID Alternatives with oversight from the CPUC. Take advantage of this great opportunity today to offset the cost of installing solar panels on your home!
The Multifamily Affordable Solar Housing (MASH) program, administered by PG&E, SCE, and the Center for Sustainable Energy in SDG&E territory, has incentive rates of up to $1.80/Watt available exclusively to qualifying multifamily affordable housing projects. But be aware that applications are currently closed, with a potential waitlist!
5. Local Incentives
If you're in the San Francisco area, it's worth checking out GoSolarSF’s rebate program before it expires. This one-time cash incentive will help residential, commercial, and nonprofit organizations with their solar installations—particularly those within the low-income DAC-SASH category.
To find the latest local incentives in your area, check out the Database of State Incentives for Renewable Energy (DSIRE).
The Federal Solar Tax Credit
Though not an exclusive California solar tax incentive, the federal ITC provides additional and significant savings for solar installations
If you upgrade your residence with solar energy equipment any time between now and the end of 2032, then you are eligible to receive a nonrefundable solar tax credit on your federal income taxes that is equal to 30% of all qualifying expenses! There are no maximum limits on the amount of your residential solar system-related expenses that you can use to qualify for a 30 percent tax break.
With the solar tax credit, you receive a dollar-for-dollar reduction from your income taxes. For example, if your solar PV system costs $20,000 and you can claim 30% of the Investment Tax Credit (ITC), then you will owe $6,000 less in total income taxes for that year, essentially lowering the solar system cost to $14,000.
The current legislation allows for a rollover of the difference between your eligible tax amount and the credited amount for an upcoming year.
Thinking about going solar? Learn about your solar panel financing options.
What's covered under the federal solar tax credit?
Maximize your federal tax savings by capitalizing on the ITC. The federal solar tax credit also covers the following:
- Solar Panels are generally used to operate appliances and devices within the home
- Solar photovoltaic (PV) cells, including those used to power an attic fan (but not the fan itself)
- Onsite contractor labor fees, including permissions and licenses, assessment expenses, and developer payments for setup or preliminary setup, are all covered under the assembly cost
- Balance-of-system equipment, including wiring, inverters, and mounting equipment
- Energy storage devices that have a capacity rating of 3 kilowatt-hours (kWh) or greater (for systems installed after December 31, 2022). Even years after your initial solar system installation, you're still eligible to receive the advantages of Solar Tax Credit if you purchase and install storage batteries.
- Sales taxes on all eligible expenses.
Am I eligible to claim the federal solar tax credit?
According to the U.S. Department of Energy, to qualify for the 30% solar federal tax credit, you must satisfy the following criteria:
- Your solar PV system was set up during the time frame between January 1, 2023, and December 31, 2034
- The solar PV system is located at your residence in the United States. It doesn't have to be your primary residence, but you must have spent some time there during the year
- The solar panel system must be new or is being used for the first time
- Whether purchased with cash or financing, you must own solar panels. Leasing solar panels does not make you eligible.
How do I claim the federal solar tax credit?
To claim the federal solar tax credit, solar system owners should fill out IRS Form 5695 when filing their federal tax returns. If the solar panels were installed in 2022, the homeowner could apply for the solar credit with their 2022 federal taxes.
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