Battery Storage Rules, Solar Panel Tax Credits for California People

As the state’s Net Billing Tariff, or NEM 3.0, puts more emphasis on the value of electricity that can be exported to the grid, California homeowners are being urged to think about adding battery storage to their solar PV systems.

As it stands, the current rules allow for the excess solar power generated to be paid for at an export price that may be lower than retail electricity rates, which makes battery storage worth considering to move the solar electricity to higher value hours.

Utility incentives are not federal tax credits, however. It can lead to an incorrect federal return, an incorrect credit, or an IRS examination if the two are confused. Hire a tax professional (like a tax attorney in Beverly Hills) who can help you with better tax planning.

Understanding the Federal Solar Credit

A significant update for homeowners is that after December 31, 2025, the federal Residential Clean Energy Credit (section 25D) will no longer be available for placing property in service. The credit was typically 30% of eligible costs for qualifying solar and battery installations that were placed in service in 2025.

Qualifying expenses might include but are not limited to:

• Solar electric panels
• Qualified installation labor
• Interconnection costs, wiring costs
• At least 3 kWh of battery storage
• Some onsite preparation/assembly costs

Generally, taxpayers who take the credit for a qualified installation in 2025 file IRS Form 5695.

California Utility Rebates, and Their Impact on Taxes

One of the biggest questions is whether a California utility incentive lowers the federal credit.

In general, a public utility subsidy paid for the purchase or installation of qualified clean energy property is a qualified expense that should be deducted from a public utility subsidy. This is true whether or not the contract is paid out by the homeowner or by the utility on behalf of the homeowner. But bills or payments for exported electricity to the grid are different and typically do not offset the qualified installation cost.

State incentives will need additional scrutiny, as an incentive referred to as a “rebate” may not be eligible for the same federal tax treatment. Get a professional (like a real estate tax attorney in Orange County, CA) who can guide you in the right direction.

Things to Do or Avoid While Owning A Home

Do:

• Retain Contracts, Invoices, Receipts, Installation Records and Rebate Documentation.
• Identify if the bill for using a utility is an installation subsidy or compensation for exporting electricity.
• Subtract utility subsidies that are available under the law for eligible expenses to determine the federal credit.
• Keep records to document your cost basis in case the IRS asks for them during an audit.

Don’t:

• All California energy incentives are automatically presumed to be federal incentives.
• Take the Residential Clean Energy Credit for a system installed after 2025.
• The federal residential credit can be claimed for the use of a leased solar system, as long as the taxpayer claiming the credit has incurred the qualifying expenditures, and IRS guidance provides that the solar system must be owned, not leased or rented.
• Use NEM/Net Billing export subsidy as a purchase subsidy.

A Smart Tax Strategy

When filing, homeowners should ensure that the gross installation cost, utility incentives (if applicable), the cost, and the date of installation are in agreement. Maintain a complete paper trail of the federal credit calculation.

As solar incentives in California and federal tax laws may change, taxpayers should confirm the rules that apply to the year that their system was installed. If significant rebates or financing options are part of the mix, see a competent tax professional to avoid expensive missteps.