Solar Energy Tax – What You Need to Know

For months, the United States Congress has debated and tinkered with various pieces of legislation aimed at addressing climate change and reducing government subsidies for fossil fuels. Finally this October 11, 2019, the Senate passed the “Save America’s Future Act” (S.1634) with a 72 to 27 vote margin, and the House followed suit on October 24 with a 416 to 20 vote margin, sending the final bill to the White House for his signature. The bill will impose a “solar energy tax” on certain fossil fuels, such as natural gas and oil, and establish a rebate for the solar-powered electricity consumers.

But what exactly does that mean for you as a solar homeowner or business? Let’s take a closer look.

What Is Solar Energy Tax?

As the name suggests, the solar energy tax will apply a solar tax to the sale of solar electricity. It will not apply to purchases of solar electricity, such as through government-subsidized solar power loan programs.

The idea behind the solar energy tax is that the fossil fuel industry has been artificially propped up by government subsidies for decades. As a result, the cost of producing and transporting fossil fuels, such as oil and gas, is heavily outweighed by the subsidy.

Since energy companies receive financial benefits from the fossil fuels they sell, the solar energy tax seeks to claw some of that money back by levying a tax on the sale of those same fuels. With limited exceptions, the solar energy tax will apply to the sale of all fossil fuels, including natural gas and oil. So while the solar energy tax is not a VAT (value-added tax) like some other countries apply to certain products, it is essentially a VAT on fossil fuels.

How Is Solar Energy Tax Different From Other Taxes?

The solar energy tax is not a traditional sales tax. Instead of being based on the value of the product, it is based on the purchase price of the product. So if you bought a solar system for your home last year for $15,000 and the cost of electricity for that system was $5 per month, you will pay a solar energy tax of $5 per month ($15K x 0.20). On the other hand, if you rented that same solar system for a month and the cost of the electricity was $7 per day, you would only pay a solar energy tax of $7 per day ($15K x 0.07).

In addition to the tax on the purchase price of a solar system, the solar energy tax will also apply to the installation costs of the equipment. This means that if you added a solar roof on your home a few years ago and spent another $5,000 on solar modules and wiring, that will be subject to the solar tax, as well.

Where Does Solar Energy Tax Come From?

The solar energy tax is part of the “Save America’s Future Act,” which was spearheaded by Senators Cory Booker (D-NJ) and Lisa Murkowski (R-AK) and originally passed in the House as the “Promote Energy Independence and Climate Change Act” (H.R.852). The solar energy tax was included in the Senate legislation and championed by Senator Sheldon Whitehouse (D-RI), who said “we need to take the money away from oil companies and give it to those who can actually use it”.

The US Treasury will implement and administer the solar energy tax. Initially the revenue from the tax will be directed to the “America’s Energy Strong Fund,” which will promote renewable energy and energy efficiency projects. But Congress can decide how the money is spent, and some legislators have suggested that the revenue could be used to reduce energy prices or provide tax credits for renewable energy projects.

Who Will Be Affected By The Solar Energy Tax?

The solar energy tax will not just affect the purchase price of your solar system. You will also have to report the energy you generate on your property on a quarterly basis. If you own a business, you will have to file an individual tax form (or use an IRS e-file provider) every quarter.

Although the solar energy tax applies to the sale of all fossil fuels, including natural gas and oil, it does not apply to the purchase of those same fuels. So if you are buying your gas from a gas station, you will not have to pay the tax. However, if you are purchasing the gas from a well then you will have to pay the solar energy tax on the purchase price.

To be clear, if you are producing your own electricity through a roof-mounted solar system or other means, you will not have to pay the tax on the energy you generate. You will only pay the tax on the purchase price of the system or equipment you use.

Exemptions And Credits For Solar Energy

Fortunately, if you purchase a solar system as an investment that is going to generate energy for you and your family, you may be eligible for some tax credits or exemptions. The “Save America’s Future Act” provides that if you invest in a renewable energy source system that generates electricity, you will be able to deduct the total amount you paid for that system from your federal income taxes. The “Save America’s Future Act” also provides that if you install a renewable energy source system in a structural element of your home (such as a roof), the federal government will provide you with a generous credit of up to $5,000 toward your residential energy costs. This credit will be applied against your taxes in 2020, and then annually against your taxes thereafter.

Other legislation that provides for the aforementioned residential energy credit includes a sales tax credit in the “Promote Energy Independence And Climate Change Act” (H.R.852) and the “Energy Innovation and Modernization Act” (H.R.1424).

What Are The Possible Complications?

In theory, the solar energy tax should not pose many complications for you as an individual or business owner who is utilizing solar power. The primary issue you will have to deal with is the tax preparation and filing requirements, which are essentially the same as any other tax. However, if you are a small business owner who utilizes a personal adviser, you might have some additional issues to worry about.

The more you know, the better you can prepare. Once you have your system up and running, you will start receiving your first $5 check in the mail. So it’s not like you are going to have to learn how to file your taxes or deal with the IRS on a day-to-day basis. But it would be wise to be aware of any new rules and requirements that might come up as you go along.

Also, if you are leasing the system, you will have to make sure that you notify the leasing company in writing of any changes in your residence or business. As long as the system is paid for in advance, most leasing companies should not have any objections to your changing addresses once your existing lease expires.

In general, if you are an individual who utilizes solar power as an energy source, you will not have to worry about any complications resulting from the solar energy tax. But if you are a business owner who utilizes solar power, you might have to file an individual tax return every quarter or pay the tax on your business profit, depending on whether or not your system generates more income than you pay in rent. This could become quite the chore, especially if you have a large business with multiple locations.

Scroll to Top