Solar photovoltaic systems are an excellent way for homeowners and businesses to save money on their energy bills while reducing their carbon footprint. To further incentivize the adoption of solar energy, the government has established both Federal and Hawaii Solar Tax Credits; these sizable incentives are available to make solar energy more accessible and affordable.
How the Hawaii Solar Energy Tax Credit programs work:
The tax incentives provided by both federal and state are actual dollar-for-dollar reductions in the amount of income tax you would otherwise owe; credits are not reductions to your income or rebates on system cost. The federal Investment Tax Credit (ITC) and Hawaii solar tax credits for solar energy do not have income restrictions. These credits are available to all taxpayers who install qualifying solar PV systems, regardless of their income level; additionally, the tax credits can be used against either the federal income tax or the alternative minimum tax.
Credits are earned on the solar systems’ expenditure, however, both federal and state laws specify that the credit shall be claimed when the qualifying solar energy equipment is “installed and placed in service”, meaning, the credit is available in the year in which the solar PV system was installed.
Federal and state tax incentives for solar energy are not contingent upon income and in general, are non-refundable, which means they can only be used to reduce a taxpayer’s tax liability. If a taxpayer’s tax liability is less than the tax credit they’re eligible for, they may not be able to use the entire credit in that tax year. In that case, any unused credit can be carried forward to future tax years. As noted below, Hawaii does provide a refund option, however, there are certain restrictions and using this option will decrease the credit amount by 30%.
We strongly advise taxpayers discuss with their tax professional how the Federal and/or Hawaii tax incentives outlined below may, or may not, benefit your unique tax situation.
The Federal Investment Tax Credit (ITC):
The federal tax credit offers homeowners and businesses a credit of 30% of the cost of their solar PV system. The Inflation Reduction Act (IRA) of 2022 changed the credit from its original plan of reducing to 24% for 2023 back to 30% until 2032. To claim the ITC, homeowners should complete IRS Form 5695 and include it with their federal income tax return.
For more information regarding the federal solar energy tax credit, please visit the link below.
For more information regarding the Inflation Reduction Act (IRA) of 2022 please visit the link below.
Hawaii “Renewable Energy Technologies Income Tax Credit” (RETITC):
The Hawai’i RETITC allows the economic owner of the photovoltaic (PV) system to claim up to 35% of the cost of their renewable energy system, up to a maximum credit of $5,000 per 5kW of system size. The “economic owner” of the system need not be the owner of the property being served by the system. For example, a 7.58kW system, for purpose of the tax credit calculation, would result in two (2) systems; a 5kW system and a 2.58kW system, each system being eligible for the 35% tax credit toward that portion of the systems cost (each being limited to the $5000 maximum system credit).
Hawaii homeowners and/or business “tax filers” can apply for the RETITC by completing Hawaii Form N-342 and submitting it with their Hawaii income tax return.
For additional information regarding the Hawaii solar energy tax credit, please visit the link below.
How to calculate the Hawaii solar tax credit:
As the credit value is based on the PV system size as well as the total cost; for systems 5 kW or less, the Total System Cost will be utilized to determine the tax credit. This cost is entered on “Line 1” under the “Solar Energy System” heading on the N-342 form.
For systems over 5 kW you’ll need to determine the cost per DC watt for the energy system being installed. This can be accomplished by dividing the Total System Cost by the DC system size (kW x 1000), this will give you the cost per watt. Multiply subsequent systems by the cost per watt to determine each systems cost.
For example, say you have an 8.80 kW PV system with a Total Cost of $65,000; for purposes of the tax credit, this system would constitute TWO systems, a 5-kW system and a 3.8 kW system, each systems cost will be determined by the cost per DC watt. To determine the cost per watt we first must determine the total DC wattage of the system; 8.80 kW = 8.80 x 1000 = 8800 DC watts. Now take the total system cost of $65,000 and divide this into the total DC wattage of the system; 65000 ÷ 8800 = $7.386 per watt. Now we can calculate the cost of system 1 and system 2. System 1 cost is calculated at $7.386 x 5000 = $36930 and System 2 cost is calculated at $7.386 x 3.80 = $28,066.80. Each systems’ cost is then multiplied by 35% to determine the credit value; in this example, each system is limited by the maximum credit amount of $5000 for each system resulting in a total State tax credit of $10,000.
You must use a separate N-342 form for each eligible renewable energy technology system.
The Hawaii solar energy tax credits are intended to function as a non-refundable credit; however, a refundable option is also available. The non-refundable option affords the maximum benefit as the full credit value can be utilized toward reducing the individual’s Hawaii income tax liability. If the tax credit exceeds the individual’s tax liability for the year, any unused credit can be carried forward for up to five years.
Refundable Hawaii Solar Tax Credit:
The refund option calculates the tax credit in the same manner as the non-refundable option, however, the refund option imposes a 30% reduction to the non-refundable tax credit amount, certain restrictions may also apply. This option may be selected by checking the box at Line 42(a) and completing that section of the N-342 form.
Please visit the link below for detailed instructions regarding the Hawaii RETITC and how to complete the N-342 form. https://files.hawaii.gov/tax/forms/2022/n342ins.pdf
Energy Storage System Tax Credits:
Federal: Thanks to the Inflation Reduction Act (IRA) of 2022, the 30% federal tax credit is available for all home energy storage systems with a capacity of at least 3 kWh. The electricity source used for charging (solar or grid) is no longer a limitation.
Hawaii: According to Hawaii RETITC rules; In order for an “accessory” to be eligible for the RETITC, it must meet the following two requirements:
1. Capture a renewable source of energy, convert the renewable source of energy, or store the converted energy; and
2. Be installed and placed in service on the same “property” in the same taxable year that a renewable energy technology system that qualifies for the RETITC is installed and placed in service.
PV system batteries meet the first requirement because they store converted solar energy. Thus the cost of a PV system battery will be eligible for the RETITC if is installed and placed into service on the same property and in the same taxable year that the PV system that qualifies for the RETITC is installed and placed in service. However, the battery alone DOES NOT QUALIFY for the RETITC if it is installed and placed into service the following tax year because it was not installed and placed in service in the same taxable year as a renewable energy technology system that qualifies for the RETITC.
Conclusion: We’re hopeful the information included in this article will help you when it comes time to claim YOUR Hawaii solar energy tax credits as these are a major financial benefit in the solar energy investment strategy.
It’s important to note, labor breakout figures are not typically provided as a part of the solar energy proposal or contract as those figures are often considered proprietary, much the same as profit and overhead margins. The “labor” figure represents a line-item cost, similar to wiring and other BOP costs that are likewise not specifically disclosed on a proposal or contract; from a customer’s perspective, these costs and others only pertain to establishment of the projects’ “Total System Cost”.
Neither the federal or Hawaii state tax code requires a labor breakout cost, only the “qualified solar electric property cost” as specified on “Line 1” of the federal 5695 form and/or the “total cost of the qualified solar energy system installed and placed in service in Hawaii” as specified on “Line 1” of the Hawaii N-342 form.
Hawaii Solar Tax Credits can be complex to calculate, taxpayers should research the specific requirements of any program they’re interested in to determine their eligibility and consult with a tax professional to determine which credits and incentives they are eligible for and how to claim them on their tax returns.
About the Author:
Darryl Vasquez is a solar energy professional with over 15-Years of experience in the solar industry. He holds certifications from the SEI Grid Tied Photovoltaics program and NABCEP training with hundreds of solar energy systems installed in Hawaii since 2008. Darryl is passionate about sharing his technical knowledge and expertise in solar design strategy as well as optimizing the unique financial benefits solar energy systems provide. He is especially interested in the importance of energy self-sufficiency and the growing necessity of energy storage systems. Darryl is currently the Senior Energy Consultant and Director of Sales at WikiWiki Solar & Electric. If you have any questions or are interested in discussing a Hawaii solar energy project, you can reach Darryl at (808) 204-2277 or email@example.com