The federal Investment Tax Credit (ITC) is one of the most significant financial incentives for residential and commercial solar installations in the United States. As of 2025, the ITC remains at 30% for systems placed in service by December 31, 2032. This guide explains how the ITC works, what qualifies, how to claim it, and what changes are coming after 2032. Understanding the ITC is essential for calculating your solar payback period and overall return on investment.
What Is the Federal Solar Tax Credit (ITC)?
The ITC is a dollar-for-dollar reduction in the federal income taxes you owe, equal to a percentage of the cost of a solar photovoltaic (PV) system installed on your property. The credit is available for both residential and commercial systems, though the rules differ slightly. For residential systems, there is no cap on the credit amount; for commercial systems, the credit is calculated on the basis of the system's cost, subject to certain limits.
Current ITC Percentage (2025–2032)
Under the Inflation Reduction Act of 2022, the ITC for solar is set at 30% for systems that begin construction before January 1, 2033. This applies to both residential and commercial projects. The 30% rate is a return to the pre-2020 level, which had been gradually phasing down. The schedule is as follows:
- 2022–2032: 30%
- 2033: 26%
- 2034: 22%
- 2035 onward: 0% for residential; 10% for commercial (unless Congress extends)
Note that the credit applies to the year the system is placed in service, meaning when it is fully installed and operational. For systems that are under construction but not yet operational by the end of a given year, special “begin construction” rules may apply, but it is simpler to ensure the system is placed in service by December 31 of the year you plan to claim.
Eligibility and Qualifying Systems
To claim the ITC, you must own the solar system (not lease it or enter a power purchase agreement). The system must be located at a residence or business in the United States. For residential installations, the home must be your primary or secondary residence; rental properties are not eligible for the residential credit (but may qualify for the commercial credit if the owner is a business).
Qualifying Equipment
The ITC covers the following costs:
- Solar PV panels
- Inverters
- Racking and mounting equipment
- Wiring and electrical components
- Battery storage (if charged by solar at least 75% of the time)
- Labor costs for installation
- Permitting fees, inspection costs, and sales tax
Battery storage alone qualifies for the ITC if it is installed with solar or retrofitted to an existing solar system, provided the battery is charged by the solar panels for at least 75% of its annual energy. This makes battery storage an attractive addition, especially for those interested in battery sizing for home solar storage or battery sizing for backup vs. self-consumption.
What Does NOT Qualify?
- Leased systems or PPAs (the credit goes to the system owner, not the host)
- Solar water heating systems (those are covered by a different credit, but not the ITC for PV)
- Maintenance and extended warranties (though some argue warranty costs are part of the system price; consult a tax professional)
- Systems installed on rental properties (for residential credit)
How to Claim the ITC
Claiming the ITC requires filing IRS Form 5695 (Residential Energy Credits) with your federal tax return. For commercial systems, use Form 3468 (Investment Credit). The process is straightforward but requires documentation.
Step-by-Step for Residential Installations
- Install the system and ensure it is placed in service by December 31 of the tax year.
- Obtain documentation from your installer, including a detailed invoice, proof of payment, and a certificate of completion.
- Fill out IRS Form 5695. Part I calculates the credit. For solar, you enter the total qualified solar electric property costs on line 1. Multiply by 0.30 (for 2025) and enter the result on line 6. The credit is limited to your tax liability; any excess can be carried forward to the next year.
- File your tax return with Form 5695 attached. You can use tax software or a professional preparer.
Important Notes
- The ITC is non-refundable, meaning you cannot get a refund for the portion that exceeds your tax liability. However, unused credit can be carried forward to future tax years.
- If you install a system that costs $20,000, your credit is $6,000. If your tax liability is only $4,000, you can use $4,000 in the current year and carry forward the remaining $2,000 to next year.
- For commercial systems, the credit may be subject to prevailing wage and apprenticeship requirements for projects over 1 MW AC to qualify for the full 30% rate. Smaller commercial projects generally do not face these requirements.
ITC Interaction with Other Incentives
The ITC can be combined with state and local incentives, such as rebates, performance-based incentives, and net metering. However, you must reduce the basis of the system cost by any state or utility rebates received before calculating the federal credit. For example, if your system costs $20,000 and you receive a $1,000 state rebate, your qualified cost for the ITC is $19,000, and the credit is $5,700 (30% of $19,000).
Net metering policies vary by state and utility, and they affect the economics of solar. Understanding net metering explained and solar buyback rates comparison can help you estimate savings. Additionally, some utilities offer time-of-use rates or net billing, which changes the value of solar exports. For a deeper dive, see net billing vs net metering.
ITC for Commercial and Utility-Scale Systems
Commercial solar installations, including those for businesses, non-profits, and agricultural operations, can also claim the ITC. The rules are similar, but there are additional complexities:
- The credit is computed on Form 3468.
- For systems placed in service after 2024, the base credit is 6%, but it can be increased to 30% if certain requirements are met (prevailing wage and apprenticeship for systems over 1 MW AC).
- Bonus credits are available for using domestic content (10%), locating in an energy community (10%), and serving low-income communities (10–20%).
These bonuses can stack, potentially raising the total credit above 30%. Businesses should consult a tax advisor to maximize benefits. For small businesses considering solar, a microgrid feasibility study for small business can help assess whether solar-plus-storage makes sense.
What Changes After 2032?
Under current law, the residential ITC drops to 26% in 2033, 22% in 2034, and then to 0% in 2035. The commercial ITC drops to 26% in 2033, 22% in 2034, and then to a permanent 10% (for systems that begin construction before 2035). However, Congress could extend the credit at any time, as it has done several times in the past. For planning purposes, it is prudent to assume the phase-down will occur as scheduled.
For those considering solar after 2032, the economics will rely more heavily on state incentives, net metering, and falling hardware costs. The complete guide to distributed energy economics provides a framework for evaluating projects under different policy scenarios.
Common Questions and Misconceptions
Can I claim the ITC if I install solar on a second home?
Yes, as long as the home is used as a residence and you do not rent it out. Vacation homes qualify.
Does the ITC apply to solar shingles or building-integrated PV?
Yes, as long as they generate electricity. The credit covers solar roofing materials that serve as both roof and solar generator, but only the portion of the cost attributable to the solar function qualifies. The IRS has not issued specific guidance on how to allocate costs, so consult a tax professional.
What if I install a system in 2025 but don't have enough tax liability?
You can carry forward the unused credit to future years. There is no limit on the carryforward period for residential credits (commercial may have a 20-year limit).
Can I claim the ITC if I finance the system with a loan?
Yes, as long as you are the system owner. The credit is based on the full system cost, not just the down payment. However, if the loan includes interest or fees, those are not part of the qualified cost.
Conclusion
The federal solar ITC remains a powerful incentive for going solar in 2025 and beyond. At 30% through 2032, it significantly reduces the upfront cost and shortens the payback period. For homeowners, the credit is straightforward to claim with Form 5695. For businesses, additional bonus credits may be available. As the credit phases down after 2032, early adoption is financially advantageous. To evaluate whether solar is right for your property, consider using a solar payback calculator and comparing your solar payback vs investment returns.
Related Articles
- The Complete Guide to Distributed Energy Economics
- How to Calculate Solar Payback Period
- Net Metering Explained
- Battery Sizing for Home Solar Storage
- Microgrid Cost-Benefit Analysis