No more electric bills? Huge tax rebates? It sounds too good to be true, and unfortunately, in many cases, it is.
The solar energy movement has gained momentum in recent years, fueled by lower solar panel costs, the consumer urge to fight climate change, and rising energy bills. However, the availability of real, but sometimes confusing, government incentives has also led to an increase in scams targeting these tax benefits.
Understanding the risks and recognizing the signs of fraud can help you protect your finances and ensure you reap the legitimate benefits of solar incentives.
Understanding legitimate solar tax credits vs. scams
The federal government offers three tax credits for solar energy projects:
- A residential clean energy credit
- An investment tax credit (ITC) for businesses that install a solar energy system
- A production tax credit (PTC), which provides a per kilowatt-hour (kWh) tax credit for electricity generated by solar and other qualifying technologies.
This article focuses on the Federal Solar Investment Tax Credit (ITC), a legitimate incentive that allows businesses to claim up to 30% of the cost of installing solar energy systems on their federal tax returns. The credit applies to systems installed between 2022 and 2032 and covers solar panels, labor, equipment, and other related expenses.
Legitimate solar tax credit programs have strict eligibility requirements. For example, the ITC is based on the cost of building the system. To calculate the credit, multiply the applicable tax credit percentage by the amount spent on eligible solar power property.
A tax credit is a dollar-for-dollar reduction in the amount of income taxes you owe. While some tax credits are refundable, the solar tax credit is non-refundable. This means you can only claim a credit amount up to your tax liability for the year. If your tax liability isn’t enough to offset the available tax credit, you can roll over unused portions of the tax credit to a future tax return.
Eligible property for the federal solar tax credit includes:
- A Solar PV system, including solar panels, inverters, racking, and balance-of-system equipment (plus sales and use taxes on the equipment)
- Concentrating solar-thermal power (CSP) equipment necessary to generate electricity, heat or cool a structure, or to provide solar process heat
- Installation costs
- Step-up transformers, circuit breakers, and surge arrestors
- Energy storage devices with a capacity rating of five-kilowatt hours or greater (even if not charged with solar)
To qualify for the full federal tax credit, projects must satisfy the Treasury Department’s labor requirements, meaning all wages for construction, alterations, and repair work must be paid at the prevailing rates of that location. In addition, 15% of the total construction labor hours for a project must be performed by an apprentice.
To claim the credit, you must have proper documentation, including receipts, contracts, and proof of payment. If the Internal Revenue Service (IRS) selects your return for audit, you will need to have documentation for all eligible expenses used to calculate the claim.
Common solar tax scams and their tactics
Scam tactics vary, but according to the Federal Trade Commission, most federal solar tax credit scams start with someone who claims to be with the government or your public utility company, promising you can save big on your utility bills.
They may offer an “energy audit” or promote a “free” program to make your home more efficient with solar energy. They often promise that huge rebates, tax credits, or utility rebates will pay for the solar panels, but to get these benefits, you must pay hefty upfront fees to install solar panels on your property.
Unfortunately, many victims of these scams are left with large loan payments, no tax credits, faulty systems, leaky roofs, and little to no reduction in their utility bills. By the time you realize you’ve been scammed, the “contractor” is long gone.
How to spot (and avoid) a solar tax scam
Here are a few red flags to watch out for to avoid getting burned by a federal solar tax credit or state tax credit scam:
- Unreasonable guarantees. Fraudsters often pose as contractors, promising immediate tax rebates or “zero-cost” solar systems. They may guarantee massive tax refunds, “free” systems, or no upfront costs. Remember, if an offer seems too good to be true, it probably is.
- Unsolicited offers. Watch out for solar salespeople knocking on your door, calling you on the phone, or reaching out on social media. Often, these are ruses to collect personal identifying information. For example, Huntsville Utilities recently warned customers of scammers posing as solar contractors to gather personal financial data.
- Unlicensed or unregistered contractors. Always verify the legitimacy of the contractor through your state’s licensing boards. If you’re legitimately interested in a solar installation for your business, get bids from several licensed contractors in your area. A good place to start is organizations that are licensed, certified, or registered with the North American Board of Certified Energy Practitioners or your state’s Department of Energy. Ask for references and verify their past work so you don’t get stuck with substandard equipment, shoddy installation, or inefficient systems that require costly repairs later.
- High-pressure tactics. Scammers may employ high-pressure sales techniques urging you to “act now” to lock in benefits before they expire or limited-time offers that turn out to be non-existent or fraudulent. They may pressure you into signing contracts without fully explaining the long-term costs or obligations.
- Misrepresentation of tax credits. Scammers may exaggerate the financial benefits of solar credits, claiming they offer 50% or more in savings or claiming you can apply the federal tax credit to rental properties, which is not allowed. To protect yourself, avoid relying solely on the advice of the salesperson about your tax benefits. Reach out to a tax advisor who is familiar with solar tax credits to ensure your project qualifies for the solar tax credit. Remember, the government does not offer free solar panels or install solar panels on private property for free.
- Confusing documentation (or no documentation at all). Require a written agreement that outlines costs, timelines, warranties, and payment terms. Be sure to read the fine print before signing anything. According to AARP, some victims of these scams have signed what they thought were pre-authorization documents, only to discover later that they’d signed a loan agreement and authorization to start panel installation. Keep all receipts, contracts, and proof of payment.
If you suspect fraudulent activity, report it to the Federal Trade Commission (FTC) at ReportFraud.ftc.gov, your state attorney general’s office, and the FBI’s Internet Crime Complaint Center (IC3).
Get help with the federal solar tax credit from a trusted advisor
Investing in renewable energy can be a smart choice, and legitimate solar tax credits can provide generous financial benefits. However, scammers often prey on those who are unfamiliar with the rules.
Be cautious of offers that seem too good to be true, unsolicited sales pitches, and pressure to act quickly. Protect yourself by researching companies and familiarizing yourself with IRS requirements.
When in doubt, consult with a trusted tax professional who understands the complexities of solar tax credits. Protecting yourself is the first step toward a successful and legitimate investment in solar energy. Schedule a free Tax Discovery Session to avoid costly mistakes and save yourself a lot of frustration.