Picture this scenario: You just finished a call with a client who mentioned installing solar panels on her vacation home. Now it’s tax time, and she’s dropped off her tax documents, including information about the solar installation. Among the paperwork, you find two invoices: one for the solar panels, equipment, and installation labor, and another from a building contractor for roof work. Your client included a note explaining that the solar panel installation required structural retrofitting to make the roof suitable for the panels.
This is your first time dealing with solar tax credits. You know there’s some special tax benefit, but you’re not sure how it works. Which expenses qualify? How do you calculate the credit? And what about those two different invoices? Does the roof work count toward the solar tax credit?
This scenario comes from Jeremy Wells’ Tax in Action podcast, where he walks tax professionals through the residential clean energy credit. Wells, a CPA and Enrolled Agent in Florida, has seen this situation repeatedly as more clients install solar panels and other clean energy property.
While the residential clean energy credit offers substantial savings—at least until it’s eliminated at the end of 2025— tax professionals must navigate complex qualification rules, timing requirements, and cost allocation issues, often with limited regulatory guidance beyond the basic code section.
Understanding the Clean Energy Credit Basics
The residential clean energy credit comes from Internal Revenue Code Section 25D. It provides a nonrefundable credit for up to 30% of qualifying expenses on residential clean energy property. The credit was initially designed to be worth 30% of qualifying expenses through 2032, then drop to 26% in 2033 and 22% in 2034. However, H.R. 1, commonly known as the “One Big Beautiful Bill Act,” eliminated the credit at the end of 2025.
Since this is a nonrefundable credit, it can’t reduce a taxpayer’s liability below zero or create a refund. However, if the credit exceeds the taxpayer’s current tax liability, the excess carries forward to future years.
The qualifying property includes several types of clean energy installations:
- Solar panels (most common)
- Solar water heaters
- Small wind energy systems
- Geothermal heat pumps
- Fuel cell property
- Battery storage property
It’s important not to confuse this with the residential energy efficiency improvements credit under IRC Section 25C, which covers items like new windows, insulation, or HVAC systems. Those fall under a completely separate credit.
What Makes a Residence Qualify
Unlike some residential tax benefits that only apply to primary residences, Section 25D has broader requirements. The property must be installed at a “dwelling unit,” a place the taxpayer actually lives in the United States and uses as a residence. This can include second homes, vacation homes, or summer homes, as long as the taxpayer uses them personally.
However, the credit doesn’t apply to rental properties or investment properties. If a client installs solar panels on a rental property, that falls under entirely different tax provisions.
Business use of the home creates additional considerations. If more than 20% of the property’s square footage is used for business purposes (like a large home office), you’ll need to allocate the expenses. The taxpayer can only claim the credit on the portion allocated to personal use of the home. For business use of 20% or less, no allocation is required.
Qualifying Costs and Technical Requirements
Determining which costs qualify for the credit requires careful analysis of invoices and documentation. Eligible expenditures include:
- The cost of the property itself
- On-site labor costs to prepare, assemble, and install the property
- Costs to connect the property to the home’s electrical or plumbing systems
- Sales tax paid on eligible costs
However, not all installation-related costs qualify. Wells explains the critical distinction: “If the panels actually become a structural part of the roof, then we can include that cost. That’s different from saying that we had to do some work to the roof to be able to install those panels.”
In the opening scenario, the solar panel installation costs would likely qualify, but the separate roof retrofitting work probably wouldn’t. The roof work represents preparation rather than panels becoming part of the roof structure.
Different types of property have specific technical requirements:
- Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable state-endorsed entity.
- Geothermal heat pumps must meet Energy Star requirements.
- Battery storage needs a capacity of at least three kilowatt hours. As Wells notes, “I’m not an electrical expert. I’m a tax professional. I’m going to ask the client for some piece of paper from the installer showing me that it has a capacity of at least three kilowatt hours.”
- Fuel cells face cost limitations of $1,667 per half-kilowatt of capacity.
Any property that serves additional functions beyond energy production, like a swimming pool or hot tub heated by solar energy, can’t include those additional components in the credit calculation.
Rebates, Incentives, and Excess Generation
Rebates and incentives can affect the credit calculation. Direct or indirect rebates from manufacturers, distributors, sellers, or installers reduce the eligible costs. However, state government incentives typically don’t reduce the federal credit calculation.
A particularly complex issue arises when solar installations generate more electricity than the home needs. If the taxpayer sells excess electricity back to the grid, only the portion of costs related to the home’s actual electricity needs qualifies for the credit.
Wells acknowledges the challenge this creates: “Do we allocate this based on actual electricity generated and over what period of time? Should we be using data from the home’s electrical usage prior to installation? These are all unanswered questions as far as the guidance we have now.”
Timing Rules That Matter
When a taxpayer can claim the credit depends on the type of installation:
For existing residences, the credit applies when the property is completely installed, when work crews are done, and when the property is ready for use. For new construction or reconstruction, the credit applies when the taxpayer begins using the dwelling unit, which may be later than when the clean energy property is installed.
This distinction can shift credits between tax years and impact tax planning. Wells sees many situations where taxpayers start work in one year but don’t complete installation until the next year, or where installation happens late in the year but certification doesn’t arrive until the following year.
If taxpayers finance the purchase through the seller, they can calculate the credit based on the full cost of their payment obligation, not just the amounts actually paid. However, interest on financing doesn’t count toward eligible costs.
Documentation and Reporting Requirements
Tax professionals often find themselves helping clients gather documentation that the client should have obtained during the purchase process. This includes:
- Detailed invoices breaking down eligible and non-eligible costs
- Certification documents showing technical specifications
- Information about any rebates or incentives received
- Details about excess electricity generation and sale back to the grid
Taxpayers report the credit on Form 5695, Residential Energy Credits, with different lines for different types of property. The form calculates the maximum credit amount and applies limitations based on the taxpayer’s tax liability.
Since this is a nonrefundable credit, it can offset the alternative minimum tax but can’t create a refund. Any unused credit carries forward to future years.
Practical Takeaways for Tax Professionals
Wells emphasizes that, unlike most areas of tax law, practitioners have limited guidance beyond the code section itself. “We really don’t have much guidance beyond what’s in the code section itself. We don’t have any Treasury regulations related to this code section, which is not very common.”
This means tax professionals must rely heavily on professional judgment when making determinations about qualification, cost allocation, and timing. The key is asking the right questions:
- Is this the taxpayer’s personal residence, and what percentage do they use for business?
- What costs did the homeowner pay, and are there any rebates or incentives?
- For a solar electric property, is the property owner selling any electricity back to the grid?
- When was the property completely installed, or when did the taxpayer move into a new residence?
Wells notes that sometimes by helping clients gather proper documentation, “we actually help them ensure they’ve gathered all the documentation they might need in the future.”
The residential clean energy credit offers significant tax savings for qualifying installations, but success depends on careful analysis of costs, proper documentation, and understanding the technical requirements that vary by property type. While the guidance may be limited, a systematic approach to qualification and documentation helps ensure clients can take advantage of these valuable credits while maintaining compliance with tax requirements.
To hear Wells’ complete analysis and additional examples of how to handle complex scenarios, listen to the full Tax in Action episode.