Hawaii offers a state solar tax credit to encourage the use of renewable energy by making it more affordable for homeowners and businesses. With Hawaii’s high electricity costs and abundant sunlight, solar power can help residents lower their utility bills and contribute to environmental objectives.
Understanding how to claim this credit is necessary to get its full benefits. This article provides information to help you with the process.
Eligibility Requirements Under Hawaii Law
To qualify for Hawaii’s renewable energy technologies income tax credit (Hawaii Revised Statutes 235-12.5), your solar energy system must be new and operational in Hawaii during the tax year you claim the credit.1Department of Taxation. Renewable Energy Technologies Income Tax Credit (RETITC) – HRS §235-12.5 The system needs to use solar energy for generating electricity, heating or cooling buildings, or for solar process heat. This includes technologies like photovoltaic panels and solar thermal systems.
You must own the system. Leased systems or those under power purchase agreements where someone else owns the system do not qualify. The credit amount depends on the system’s actual cost, including installation, and has caps that vary by system type and capacity. Specific percentages and maximums are in place, especially for systems that generate electricity.
Residential vs Commercial Credit Options
Hawaii’s solar tax credit differs for residential and commercial applicants, primarily in system scale and credit caps. For an electricity-generating photovoltaic (PV) system on a single-family home, the credit is 35% of the actual system cost, with a maximum of $5,000 per system.2Department of Taxation. TIR No. 2022-02: Updated Guidance Relating to the Renewable Energy Technologies Income Tax Credit This cap applies to each system, so you can claim it for multiple installations if they qualify.
For commercial properties, which include multi-family residences and business locations, the credit is also 35% of the actual cost for electricity-generating systems. However, the cap is much higher at $500,000 per system.3Department of Taxation. Tax Facts 2022-2: Renewable Energy Technologies Income Tax Credit The property’s primary use dictates whether residential or commercial rules apply.
Documentation and Filing Procedures
To claim the Hawaii solar tax credit, you must submit Form N-342, Renewable Energy Technologies Income Tax Credit, with your state income tax return for the year your system became operational.4Department of Taxation. Form N-342 Instructions (Rev. 2024) – Renewable Energy Technologies Income Tax Credit This form requires details about your system, including its costs, location, and service date.
Ensure Form N-342 is accurate, with a detailed breakdown of system costs like equipment and installation. The form’s instructions provide guidance on defining actual cost and allocating expenses for multi-use systems. Once completed, attach Form N-342 to your Hawaii income tax return (Form N-11 for individuals or N-30 for corporations). The credit amount will then reduce your tax liability.
Good record-keeping is also required. Keep invoices, receipts, contracts, and proof of payment for the system’s purchase and installation. These documents are necessary if the Hawaii Department of Taxation asks for verification. Not having enough documentation can cause delays or result in the credit being denied.
Interactions With Federal Provisions
If you invest in solar energy in Hawaii, you might qualify for both the state credit and the federal Residential Clean Energy Credit. The Hawaii state credit can affect your federal taxable income. The IRS considers the state credit a reduction in your state income tax liability. If you itemize deductions, this results in a smaller state income tax deduction on your federal return, which could increase your federal taxable income by the amount of the state credit.
Rebates and other incentives can affect the cost basis for both state and federal credits. For federal purposes, rebates reduce the system’s cost basis. If rebates lower your qualified system expenditures, the amount eligible for the federal tax credit is also reduced. Similar rules for determining actual cost apply to the Hawaii credit, meaning you’ll need to adjust for any rebates received.
The federal solar tax credit, extended by the Inflation Reduction Act, provides 30% of the cost of solar PV systems through 2032, with no maximum limit, before it begins to phase down.5Internal Revenue Service. Residential Clean Energy Credit
Possible Reasons for Credit Denial
Several issues can cause denial of Hawaii’s solar tax credit. These include:
- Not meeting eligibility criteria, such as requirements for system newness, in-service date, or ownership. Leased systems or those under power purchase agreements do not qualify.
- Failing to meet specific operational and capacity requirements. For instance, photovoltaic (PV) systems on single-family homes may need a minimum total output capacity (e.g., 5 kilowatts), though exceptions can apply.
- Incorrectly calculating the actual cost by including non-qualifying expenses or costs already claimed for another tax credit under Hawaii Revised Statutes Chapter 235.
- Documentation errors or omissions, such as an incomplete or inaccurate Form N-342, or not providing supporting documents if requested.
- For shared systems, misapplying allocation rules where each owner must file for their proportionate share.
- Claiming a system whose entire cost is used for another tax credit.
- Attempting to claim credit for solar water heaters mandated for new single-family homes (under Hawaii Revised Statutes 196-6.5), or for wind systems installed as substitutes under that mandate.6Justia Law. Hawaii Revised Statutes § 196-6.5 – Solar Water Heater System Required for New Single-Family Residential Construction (2024)
Following Department of Taxation guidance is important to avoid denial.
Compliance With State Audits and Reviews
If you claim the Hawaii solar tax credit, be aware that the Hawaii Department of Taxation (DOTAX) may audit your return. Audits are conducted to verify claimed credits and ensure compliance with tax laws.
Should your return be selected for review, DOTAX will notify you and may request documents to support your claim (as per Hawaii Revised Statutes 231-7).7Justia Law. Hawaii Revised Statutes § 231-7 – Audits, Investigations, Hearings, and Subpoenas (2024) This includes records verifying system cost, service date, and ownership. Keep organized and complete records for at least three years.
During an audit, examiners check that all eligibility requirements are met and that credit calculations are correct. If DOTAX finds discrepancies, they may issue an Information Document Request; respond promptly and completely.
If DOTAX proposes adjustments to your credit, you have rights under Hawaii’s Taxpayer Bill of Rights.8Department of Taxation. Hawaii Taxpayer Bill of Rights (Rev. July 2022) You can address disagreements with audit findings through the Administrative Appeals Office (AAO), which offers an informal dispute resolution process.9Department of Taxation. How to Appeal Your Audit Assessment Specific procedures and timelines apply to appeals.