Should I Pay Cash, Finance, or Lease Solar Panels?
With over 3 million solar panel systems installed in the US, going solar is no longer a hidden opportunity. If your roof receives direct sunlight, chances are you've encountered solicitations about installing solar on your home, whether through door-to-door visits, phone calls, or encounters in supermarkets or hardware stores.
Solar is often advertised as requiring $0 down with immediate savings, sometimes implying that the government covers the system's cost. While it's true that federal, state, local, and utility incentives significantly defray the expense of solar installation, resulting in either upfront or monthly savings for homeowners, the reality is that solar panels are not free. When you hear of solar being pitched as $0 down, it typically refers to a solar loan, lease, or power purchase agreement (PPA).
Does it make sense for me to own my solar panels?
The first decision revolves around whether you will ultimately own your solar PV system. Ownership entails paying for the system outright after accounting for any upfront incentives or rebates or utilizing a loan to procure it.
Whoever owns the system, whether you or a third party, is eligible for a Federal Tax Credit. You must have sufficient tax liability to benefit from this tax credit, meaning your total payment to the federal government equals or surpasses the credit's total value. A lease or PPA may be more advantageous if you don't pay federal taxes, as the tax benefits are passed on to you through lower monthly payments.
How does the tax credit work?
The federal tax credit allows for a dollar-for-dollar reduction in income liability. There's no income limit, so whether you earn $40,000 or $400,000 per year (or any amount in between), you can claim this credit using Form 5695. Most accountants are familiar with this filing and have clients who've taken advantage of the credit.
If, for example, you paid $10,000 in federal taxes and had a $20,000 tax credit, you could claim $10,000 in the year of installation and carry forward the remaining credit. However, most homeowners hope to claim the entire credit in the installation year.
If you finance your system through a lease or PPA, a third party owns the system and monetizes the tax credit. This enables you to enjoy low monthly payments on your lease or PPA, whereas, without this credit, payments would be higher.
How is the tax credit calculated?
The tax credit equals 30% of eligible expenditures for homeowners who own their systems, usually the total contract price of the PV system.
In certain cases, the tax credit's value can increase to 40% or even 50% for leased systems. Under special provisions, commercially owned systems can qualify for tax credit bonuses. Technically, a lease or PPA is commercially owned. Residents in energy communities may receive a 10% tax credit bonus if the system is commercially owned. Additional provisions allow for another 10% bonus for systems with domestically manufactured content. Many homeowners may prefer a lease or PPA if eligible for these provisions, as the additional tax credit value translates into lower payments.
Buying vs. Financing Solar Panels:
Purchasing: You gain full ownership and long-term savings on electricity bills by paying upfront for your solar panel system. You also receive any incentives or credits directly, maximizing long-term savings.
Financing: Solar loans allow you to spread out the purchase cost with monthly payments, potentially at lower interest rates than traditional loans. Solar loans are popular; most can be transferred like a water bill upon selling your home.
Leasing vs. PPAs for Solar Panels:
Leasing: Solar leases often entail no upfront costs—you lease the panels and pay a fixed monthly rate. You don't own the panels; the leasing company covers insurance, maintenance, and a power production guarantee. Payments are fixed, and the system guarantees a certain amount of electricity.
PPAs (Power Purchase Agreements): Similar to leases, PPAs typically have no upfront costs. Unlike leases, PPAs involve buying all electricity at a set price per kilowatt-hour. Your payment fluctuates with system output, similar to utility billing, but with a set rate per kilowatt-hour. Some PPAs estimate your average payment for the year, adjusting it at year-end based on actual production. This offers predictable payments, paying only for produced power.
Choosing the Right Option:
There's no wrong way to go solar — all options listed can save money. However, there are pitfalls to avoid. Regardless of financing type, ensure you don't overpay for a system and choose an installer providing high-quality installation and equipment. Select a reputable company with high-quality equipment that enhances your home.