How do I write off solar panels for rental properties when I claim as a real state professional to run a rental business？
Thanks Helen
Hello Helen,
Thank you for asking how to write off your solar panels for your rental property. As you are probably already aware, the recent enactment of the Inflation Reduction Act of 2022 enhanced the availability of the solar credit for residential real property you live in, bumping the credit percentage back up to 30% for 2023. However, for property used in a trade or business or as rental property, you cannot claim the solar energy credit using the residential real property rules since you are not using the property as a personal residence. Rental properties and trade or businesses, as in your case, must use the business energy credit under §48.
The IRA ’22 bumped the energy credit under §48 up as well but in a more limited fashion. The credit had been reduced to 26% for tax returns filed in 2020 or 2021 and was further reduced to 22% for tax returns filed for 2022, and it was going to continue at 22% until December 31, 2025. These reductions were eliminated for taxpayers who placed qualified energy property in service in 2022 through December 31, 2025. The Act also expanded the definition of qualified energy property to include energy storage technology (i.e., batteries), biogas, microgrid controllers, and interconnection property.
To qualify for the credit, the property must be located in the United States and:
- The construction, reconstruction, or erection of the property must be completed by the taxpayer or, if purchased by the taxpayer, the original use must start with the taxpayer.
- The property must be subject to depreciation or amortization. As such, it is only available to property used in a trade or business or for the production of income.
- The property must meet quality and performance standards that are in effect at the time of acquisition. Generally, you can rely on the manufacturer’s certifications to determine whether the property qualifies.
The credit is two-tiered for property placed in service after December 31, 2021. The amount of the credit is reduced from 30% to 6% for most properties, including solar energy property, hybrid solar lighting, geothermal property, qualified fuel cells, small wind energy property, waste energy property and waste energy recovery property, energy storage technology, biogas, microgrid controllers, and combined heat and power system property. Essentially, the base credit is reduced to 6%, but taxpayers can be eligible for a “bonus” credit rate back to 30% (or 10% for certain energy properties) if they meet certain requirements. These are the “wage and apprenticeship” requirements, and you can find more information on them in the instructions for Form 3468,
Investment Credit.
However, the full 30% credit can still be claimed if those requirements are not met, provided the facility has an output of less than 1 megawatt or the construction began prior to the date that is 60 days after the Secretary publishes guidelines related to the wage and apprenticeship requirement - so most small businesses and rental properties will still qualify. Since most residential solar property is measured in kilowatts, it’s most likely that your rental properties would qualify under this small system exception without worrying about the wage and apprenticeship requirements. To claim the credit, you’ll need to file Form 3468 with your tax return and complete Part I (check box 7a if you qualify for the under 1 megawatt credit) and Part VI-B.
You may want to act fast, though, as currently, the credit is only available for property in which construction begins before January 1, 2025.
We hope this answers your questions, but you may want to consult with a tax professional regarding your particular tax situation, as numerous factors can impact how beneficial this credit is for you.
Sincerely,
Carolyn Richardson, EA, MBA