Solar and wind energy credits
New tax credits could make it easier
Issue #115 • January/February, 2009
Brief History: In 2005 Congress passed the “Energy Policy Act of 2005.” However, it should have been named the oil, gas, coal, and nuclear industry subsidizing bill, since 75% of the tax incentives and research grants went to these industries and less than 25% was actually directed to alternative energy. The 2005 bill did provide a 30% Federal income tax credit for the purchase of a solar system, but this credit was capped at $2,000, regardless of total system cost, and was scheduled to expire December 31, 2008.
Few people will order a $30,000 solar power system just to get a $2,000 maximum Federal income tax credit.
After Congress changed hands in 2006, an attempt was made to correct some of the shortcomings of the 2005 Energy Bill and try to increase the share going towards alternative energy, but little progress was made until this past October, when Congress cobbled together what many of us feel was nothing more than a massive tax-payer rip-off bill to bail out greedy Wall Street bankers.
You see, buried deep in this bailout bill there is the same energy bill that had been bottled up in committee for several years, and since the entire bailout bill passed, the energy bill is now law, too. Although I am not a tax lawyer and do not play one on TV, I am going to attempt to translate this legislation’s legal jargon to see how the energy section of this bailout bill could help an average homeowner, farmer, or small business.
It should be understood that this summary is not intended to serve as tax advice, and anyone considering a solar system purchase should consult with their tax preparer.
Energy Improvement & Extension Act of 2008
The energy bill that was included in the October 2008 banking bailout bill lifts the $2,000 credit limit cap that was in the older 2005 Energy Bill. This means any solar system placed into operation after December 31, 2008 will have no Federal tax credit limit. For example, a high-end solar photovoltaic power system costing $50,000 would generate a $15,000 credit towards a homeowner’s Federal income tax liability.
This 2008 legislation also included a tax credit for wind-driven electric generators. However, the 30% Federal income tax credit for a wind system is limited to $1,000 per kW of installed wind generating capacity up to maximum of $4,000.
Both tax credits will remain in effect for eight years and will end on December 31, 2016. Although there are a few exceptions, this 30% solar tax credit is not dependent on where the money comes from to make the purchase, as long as you didn’t knock off a liquor store. You can purchase the system with cash, a loan, add to a mortgage, or max out your credit card; the tax credit is calculated on the total installed cost of the solar system including installation charges. For those taxpayers that only pay the alternative minimum tax (AMT), for the first time this solar tax credit will also apply to offset the alternative minimum tax.
If you do not owe enough Federal income tax in a given year to make use of the full credit amount, this bill allows carrying your solar tax credit forward for up to 20 years.
Affect on businesses
This 2008 legislation allows small businesses and corporations to also take advantage of this Federal income tax credit, plus it allows a five-year accelerated depreciation expense on the cost of the solar system (actually the depreciation is based on 85% of the equipment cost). Being allowed to take both the accelerated depreciation and a Federal income tax credit for a solar system that is being installed to reduce monthly utility costs may cause many businesses to decide it’s time to go solar. Although this could change in the future, this legislation currently does not reduce the allowed Federal tax credit if you will also receive a separate solar tax credit from your state, or as a utility rebate for installing a wind or solar system.
Things get a little more complex if you are a non-profit corporation making the solar purchase, pay no Federal income tax, or do not actually own the property where the system is being installed. For these situations, this new energy legislation allows setting up a sale-leaseback contract with an equity investor, as long as this agreement was put in place within the first three months of the solar equipment purchase date.
This legislation also allows creating long-term power purchase contracts, limited partnerships, and prepaid energy services contracts. These more-exotic financing methods are attractive to investors since the investor will be the actual owner of the solar equipment and can claim the 30% tax credit and the accelerated depreciation tax deduction, while receiving monthly utility payments from the business or tax-exempt organization actually using the solar system. The business leasing the solar system in turn gets to utilize solar in their operation and will have lower utility costs without making a large cash outlay. In some leasing arrangements you may be able to pay off the lease using the savings from your lower monthly electric bills, then take ownership at the end of the lease through a buyout arrangement.
Since the tax credit is calculated on the cost of the “equipment,” there are some restrictions on what is included in this equipment cost. For example, if you are a rancher, you could not include the cost for drilling a well or the DC pump down in the well or pond that is used to supply water to your livestock. However, you could include the cost for the solar equipment required to power this pump including the solar modules, pole mount, charge controller, wiring, batteries, and installation labor.
The tax credit would apply to a solar system used to power your home which can include the cost of the solar modules, the inverters, charge controllers, batteries, transfer switchgear, array wiring, and disconnects. It can also include the roof mounting hardware for the solar modules, but not the cost of the roof.
The tax credit would apply to a solar domestic hot-water system which can include the solar hot-water panels, differential temperature controls, antifreeze or drain-bank tank, heat exchanger, circulating pump, and a solar hot-water tank, but not the cost for a conventional gas or electric hot-water tank if added for backup hot-water heating. The cost for passive solar architectural features including solar light tubes, solar-heated greenhouses, solar swimming pool heaters, and passive solar-heated Trombe walls cannot be included.
Normally the solar system cost used to calculate this tax credit will include both the material and labor costs. For professionally installed systems the credit will take effect after the date the system is finished and signed off by the installer, as long as all permits and inspections have been satisfied. To receive the full 30% Federal income tax credit, this signoff date must be after December 31, 2008 and before December 31, 2016. If you purchase a solar “kit” and install it yourself, you cannot add your own labor costs, and the startup date is considered to be the date you purchased the solar equipment, not the date it was installed.
There are many regulations and guidelines that could affect how, if, and when you can take this Federal income tax credit. However, this new legislation provides ways that almost any homeowner or business will be able to take part in this solar and wind tax incentive. Federal tax forms and guidelines to use when claiming this tax credit are still being developed as I write this article. Please check with a tax professional to be sure how this new energy legislation will affect your specific tax situation, especially if you are a business or non-profit organization.
I am anticipating that the demand for solar systems will significantly increase after this tax credit takes effect on January 1, 2009 and there will soon be many solar dealers with no prior experience entering this new market. I suggest that you be very careful in choosing a reliable solar dealer who has verifiable installation experience and customer references. The North American Board of Certified Energy Professionals (NABCEP) tests all solar installers at the National level and this certification requires proof of experience and recurring educational courses. Some states also have their own solar installer requirements and licensing, and you should contact your state’s Energy Office to locate a certified solar installer for your area.