Unlock the Facts: Are Your Illinois Solar Incentives Taxable?

September 15, 2023

By: Chris Gersch

Article at a Glance

Many states have adopted Renewable Portfolio Standards (RPS) goals to encourage clean energy use. Illinois’s RPS goal is to generate 50% of electricity from clean energy sources by 2040. The state offers many solar incentives to help it meet this goal. 

Here’s what you need to know about which solar incentives are available in Illinois and what they mean for your taxes.

Are Solar Incentives Taxable in Illinois?

Illinois solar incentives are taxable income based on four key sections in the Internal Revenue Service (IRS) code and a private letter ruling. A private letter ruling is an official decision the IRS publishes to clarify tax code questions and set regulations.

What the IRS Code Means for Solar Incentives

The four key sections of the IRS Code that determine whether Illinois solar incentives are taxable are:

  • Section 61: Section 61 states gross income is all income from any source except those excluded. Energy conservation subsidies are excluded, but renewable energy credit payments are not.
  • Section 63: Section 63 defines taxable income as gross income minus deductions.
  • Section 136: Subsidies that public utility companies provide for the purchase or installation of energy conservation measures don’t count as gross income. However, payments to or from a qualified cogeneration facility or small power production facility don’t count as subsidies.
  • Section 167: The IRS allows for a depreciation deduction on properties you use in business or trade and property held for income production.

IRS Rulings on Solar Incentives as Taxable Income

In 2010, a residential taxpayer purchased a solar electric power system and participated in a public utility company’s energy incentive program. By transferring ownership and title of the renewable energy credits to the utility company for a set term, the taxpayer received a one-time payment. The IRS ruled the incentive as part of the taxpayer’s taxable gross income.

There was a second private letter ruling in 2016, which contradicts the 2010 ruling. Utility companies charged customers utility bills to collect funds for residential solar incentives. They transferred the funds to a state organization, sending them to eligible contractors who installed the solar systems. The IRS determined the payments were subsidies, so homeowners didn’t have to include them as gross income.

Illinois Shines Renewable Energy Credits Are Taxable

The Illinois Shines program, the state’s Solar Renewable Energy Credit (SREC) program, provides energy credits to solar customers. Customers can sell these credits for profit, which is similar to the private letter ruling in 2010. Since the taxpayer is selling the credits for profit, it’s part of their taxable gross income. However, it doesn’t make a significant difference whether the incentive counts as part of your taxable income or not because of the federal solar investment tax credit (ITC).

Federal Solar Investment Tax Credit: What You Need To Know

Homeowners who install a solar energy system by December 31, 2032, are eligible for a tax deduction through the ITC. The deduction equals 30% of the system’s total cost — including labor — so homeowners won’t have to pay taxes on that amount. Qualifying taxpayers must own their solar system or have a loan, and the home must be their primary or secondary residence.

You must file IRS form 5695 with your federal tax return to receive this deduction.  

Illinois Solar Incentive Programs  

You can qualify for state incentives for renewable energy. Some of the top solar incentives in Illinois are:

  • Illinois Shines: You earn one credit per 1,000 kWh (kilowatt per hour) of generated energy. It doesn’t matter what you use the energy for — you’ll still receive money for it. Illinois has an SREC market where you sell the credits. Your solar company sets up your system so your credits are automatically logged and sold. You’ll receive a lump sum payment for your SRECs in fifteen years or two payments — one in seven years and one in fifteen years.
  • Illinois Solar for All: This program allows low-income households — those with incomes below 80% of the median household income in Illinois — to receive solar panels at no upfront cost. It’s an excellent choice if you don’t qualify for financing or have the cash to buy a solar system outright.
  • Solar equipment tax exemption: The solar equipment tax exemption prevents your property taxes from increasing after installing solar panels, even though they increase your home’s value.
  • Net metering: Utility companies provide energy credits if you produce excess energy that you sell back to the grid. Net metering helps offset your utility bills.
  • City of Chicago Solar Express Permit Program: Chicago residents who file a permit for their solar equipment can expedite the approval process and save $100.

State-Specific Considerations for Illinois Solar Incentives

These incentives allow you to enjoy cost savings and all the benefits of a cleaner energy system. However, there are some state-specific considerations to keep in mind when installing solar in Illinois: 

  • Taxable SRECs: Illinois SREC payments that you receive are taxable. You can elect to have the taxes removed from your payment, but you should still plan to pay taxes on earnings through this program.
  • Sales tax: Illinois doesn’t waive sales tax on solar panel equipment.
  • Federal ITC: The current ITC is 30%. In 2033, the rate will drop to 26%, then 22% in 2034.
  • Net metering rate: All utility companies in Illinois must participate in the net metering program. Illinois is currently crediting all excess energy at the full retail rate.

Is Going Solar Affordable?

Illinois’s solar incentives make solar power more affordable and accessible to residents. You can save thousands of dollars using various programs, credits, and rebates. Most solar panels pay for themselves through offset energy costs and continue to offer savings.

Explore Your Solar Options With RxSun

RxSun provides solar consultation, financing, and installation services. Based in Chicago, Illinois, we install solar panels for customers in our area. We have the knowledge and experience to provide a smooth, easy installation and as many solar incentives as you qualify for. 

Call (800) 607-9786 to learn how we can help you receive solar panels at a lower upfront cost.  

About The Author

Chris Gersch

Chris Gersch

Mr. Christopher Gersch brings over 20 years of professional leadership experience and a dynamic understanding of energy markets to the clean energy industry. He began his career as a trader at the Chicago Board of Trade and then utilized his expertise to form eleven businesses, including Verde Solutions, Navigate Power, RxSun, and Fresh Coast Solar.

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