WIll I able to claim my solar tax credit?

[jrincon]

I recently purchased solar panels. I'm curious as to how my situation will work. My panels were installed on 12/12/2022. They haven't been turned on. They're no scheduled for at least another couple of weeks. The financial company has already sent the letter saying it's been installed and will be billed here in February. I'm just wondering if I'll be able to get the tax credit because I only have until 4/2024 to pay them the incentive amount. Anybody know how it works? Can I claim the credit since it's been installed and will be getting billed soon? Or does the panel have to be actually turned on before I can do it? Thanks

[DoninGA]

Since the installation was completed in 2022 you can take the energy credit on your 2022 tax return.

IRS Form 5695 Residential Energy Credits instructions - https://www.irs.gov/pub/irs-pdf/i5695.pdf

Costs. For purposes of both credits, costs are treated as being paid when the original installation of the item is completed

[Opus 17]

We always say the credit is claimed as of the date they are "placed in service," regardless of the payment arrangements.   Typically, this means they are installed, inspected, and providing power.  So that would be on your 2023 tax return, based on your facts.

If you have entered an arrangement where you are supposed to pay the incentive to them as a downpayment, but you won't actually get the incentive until 2024 due to their delay in turning the system on, I think you need to have a conversation with the sales department.  Here's the actual text of the law.

https://www.law.cornell.edu/uscode/text/26/25D

Footnote: The actual law says "Except as provided in subparagraph (B), an expenditure with respect to an item shall be treated as made when the original installation of the item is completed."  However, when the law talks about the declining credit percentage it says "in the case of property placed in service after December 31, 2021, and before January 1, 2033, 30 percent; in the case of property placed in service after December 31, 2032, and before January 1, 2034, 26 percent" and so on.  If "completed" did not mean the same thing as "placed in service", then you would have a situation where something completed in December 2032 but not turned on until January 2033, would qualify for a 26% credit to be claimed on the 2032 return where the credit is 30%.  Laws are usually read as if they make sense, so most likely a court would rule that in this case "completed" and "placed in service" are the same thing.

[Opus 17]

---

@DoninGA wrote:

Since the installation was completed in 2022 you can take the energy credit on your 2022 tax return.

IRS Form 5695 Residential Energy Credits instructions - https://www.irs.gov/pub/irs-pdf/i5695.pdf

Costs. For purposes of both credits, costs are treated as being paid when the original installation of the item is completed

---

I disagree.  Does "completed" used in 25D(e)(8) mean something different than "placed in service" in 25D(g)?  Do you think it's really "completed" if it's not turned on?  Or do "completed" and "placed in service" really mean the same thing. 

[DoninGA]

@Opus 17 I must respectively disagree.  The system is readily available for the function it was designed to do. 

https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=726d9ae63c....

The term placed in service means the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity.

[Opus 17]

---

@DoninGA wrote:

@Opus 17 I must respectively disagree.  The system is readily available for the function it was designed to do. 

https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=726d9ae63c....

The term placed in service means the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity.

---

It's not in readiness if it's not properly inspected and connected.  

"They haven't been turned on. They're no scheduled for at least another couple of weeks."

One might quibble over different levels of "not turned on."  Are the final wires not connected?  Or, maybe the wires are connected and it only needs throwing a breaker.  But why wait weeks?  Possibly some kind of inspection must be performed.  If the installer "completes" the installation of the components but the system can't be turned on until a properly qualified inspector checks the installer's work, is the system really in readiness?  If it's physically installed but not usable because of inspections and other legal requirements, it is in readiness?    I still have to say that if you can't actually generate power because some final inspection or regulatory approval is needed, its not in readiness.

If you build an apartment building, it is "ready" when the last contractor walks out the door, or is it ready when the locality issues the C/O?

[jrincon]

Replying to you @Opus 17 and providing more details to @DoninGA 

If I can add some more details. Everything is plugged in completely. It's even gathering solar power at this moment. The only thing we're waiting for is the electric company. They told us this part takes the longest as it's only a few people doing the entire city. It's waiting on them to see if it's up to specs and if it is, the switch will be flipped then and there on the spot. 

Does this help any?

[Opus 17]

---

@jrincon wrote:

Replying to you @Opus 17 and providing more details to @DoninGA 

If I can add some more details. Everything is plugged in completely. It's even gathering solar power at this moment. The only thing we're waiting for is the electric company. They told us this part takes the longest as it's only a few people doing the entire city. It's waiting on them to see if it's up to specs and if it is, the switch will be flipped then and there on the spot. 

Does this help any?

---

If it's providing power to your house, or even a battery storage system, that's "complete" to me, even if you aren't connected to the grid.

Otherwise, I would still be reluctant.  There are a number of non-trivial things that have to happen to connect your solar panels to the grid so your meter runs backward, as they say.  It has to be the right voltage, it has to be in phase, ground protection, overload protection, and so on.  Assuming the installers did their job correctly, the person from the utility company may just have to plug a voltmeter into a test port.  But if there's a problem, they might have to make adjustments, or even call the installers back to correct an issue.   Maybe 99% of the time, they run their test equipment, everything's fine, and they flip a switch, and it takes 5 minutes. But I wouldn't call that "ready" because you might be in the 1% that has an issue that needs to be corrected.

I think the example of commercial or rental property is a good one.  A building might be 100% complete, just waiting for the building inspector to issue a certificate of occupancy, and most of the time that's a legal formality.  But a rental property is not "in service" until the C/O is issued, so even if it's a formality, it's an important one.  You can't legally rent the property without a C/O, so it might be physically ready but it's not legally ready--it's not "in service" for tax purposes.  If your solar panels are physically ready but not legally ready, can they be said to be in service, in a state of readiness?

I think if you are not legally allowed to turn them on, they can't be "in a state of readiness", even if the installation is physically complete. 

Assuming that @DoninGA and I continue to disagree, then it's up to you how to file.  Most taxpayers are never audited, and since the credit amount will be the same next year, there would seem to be little point in doing an audit for this particular issue, since any credit you had to repay for 2022 could just be claimed in 2023.  However, I would consider claiming the credit in 2022 as a small (but non-zero) risk.  You may want your own local professional tax advice.  

[AmeliesUncle]

I agree with Don.

The credit is for the "expenditure" for solar.

The "expenditure" "shall be treated as made when the original installation of the item is completed" (IRC 25D(e)(8)).

In my opinion, the installation can be completed even if the utility company hasn't told you that you can turn the power switch "on".  My installer even showed me that my meter was running backwards when he tested it, but then just told me not to turn the switches back "on" until the utility company came out.  To me, the installation was still completed.

[jrincon]

Thank you for your detailed answers. You've been very helpful. 

[mr petey]

Im in the same boat, system is installed and running but not for me , county needs to ok installation  and then power co. needs to add me to solar hook up , but if county says no take it down then what

[PattiF]

If the installation was completed in 2022, you are eligible to claim the tax credit on your 2022 tax return. DoninGA cited above from the IRS that the credit can be claimed when the system is installed.

This is from the IRS FAQs:

Q1. May a taxpayer claim the credits in the year of purchase if installation of the qualifying property occurs in a later year? (added December 22, 2022)

 A1. No.  A taxpayer may not claim the credits until the year the property is installed.  

If the unlikely event occurs that the county says no to the solar energy system, you can amend the 2022 tax return.

@mr petey 

[mr petey]

the way they sell these system makes me wonder if you can do that because , first you agree to solar system then you sign papers saying after everything is done and running is when you supposed to start payments , so until that happens its not mine

[Opus 17]

@mr petey 

The law is crystal clear that the tax credit is claimed as of the date that the system is “installed.“ There is no mention in the tax law of any requirement to have a contract, or to begin making payments.

(The issue discussed above in this long prior conversation, is whether installation is considered complete if the system has not been inspected. The IRS has not given further instructions on this matter, although most of the experts believe that “installed“ means that the installation is finished, and does not require that the inspection be performed or that the system be turned on.)

[Opus 17]

@mr petey 

Also, I believe that under real property law, anything that is permanently attached or installed on your real property automatically belongs to you.  The seller can have a lien on the property that gives them certain rights if you fail to make payments, but title vests in you as soon as it is permanently attached to real property that you own.