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Solar Energy Tax
Credits
Save 30% On Your Renewable Energy Investment
Residential Solar
Investment Tax Credit (IR Code §25D)
On October 3, 2008, the
President signed the Emergency Economic Stabilization
Act of 2008 into law (P.L. 110-343). This legislation
contains a number of tax incentives designed to
encourage both individuals and businesses to make
investments in solar energy, including 8-year extensions
of the section 48 business solar investment tax credit
(ITC). The important thing to note here is that the 30%
tax credit during the last two years up to Dec. 2008 had
a $2,000.00 dollar cap for residential property. This
cap has been removed for the 2009 tax year.
The bill extends the 30% ITC for residential solar
property for eight years through December 31, 2016.
Again the new bill removes the cap on qualified solar
electric property expenditures (currently $2,000),
effective for property placed in service after December
31, 2008. The bill allows individual taxpayers to use
the credit to offset both regular and (alternative
minimum tax) AMT liability, and to carry unused credits
forward to the next succeeding taxable year
So what exactly is a tax credit? This should not to be
confused with a tax deduction, which is much less
valuable. According to “Wikipedia”, the online
encyclopedia, a tax credit is “a recognition of partial
payment already made towards taxes due”.
The tax credit applies to property which use solar
energy to generate electricity for use in a dwelling
unit located in the U.S. and used as a residence
by the taxpayer. The equipment can be bought in 2008 and
even installed, the key to this credit is to when the
system is “placed into service “.
In other words, the taxpayer may claim the credit as of
the date that the installation of the residential solar
electric property is completed and the solar system is
placed into service. If an installation is begun in
2008, but the system is not placed into service until
after December 31, 2008, the taxpayer may claim the
credit for 30% of the expenditures made with regard to
the installation.
So how does this work for you, our clients? Let's say
you have a solar energy system cost of $26,000.00 that
includes equipment and installation. At tax time you
would be able to deduct 30% of the solar electric system
costs or $7,800.00 as in our example from your taxes
due, by filing a Residential Energy Credit claim. The
IRS form 5695 is attached to one's tax return. This form
is available from the IRS website at
www.irs.gov.
Another important item to
note is that if the tax credit you have is larger than
the tax you owe, any unused credit can be forwarded to
the next tax year. So in our example the tax credit was
$7,800.00 but say your taxes owed this year was only
$4,000.00, you would be able to claim an additional
$3,800.00 credit on your next tax year.
More information on the
tax credit can be found on these links:
http://www.apxsolar.com/downloads/6Fed_Tax_Guide_1.2.pdf
The Solar Investment
Tax Credit
Frequently Asked Questions
1. When is the extension of the ITC
effective for commercial property?
Answer: The extension of the ITC for
commercial solar property is effective on the date of
enactment, October 3, 2008. Since the existing credit
was not scheduled to expire until December 31, 2008,
this means that the credit has been seamlessly extended
through 12/31/2016.
2. What is the effective date for the allowance of
the sec. 48 commercial ITC
against AMT liability?
Answer: The allowance of the sec. 48 ITC
against AMT liability is effective for taxable years
beginning after the date of enactment. For most
taxpayers, this will mean that the credit against AMT is
effective beginning on January 1, 2009. However,
business taxpayers have flexibility in choosing their
fiscal year for tax purposes. If a taxpayer uses a
fiscal year that runs from November 1 - October 31st, it
would mean that they can begin using the credit against
AMT beginning November 1, 2008, rather than having to
wait until January 1, 2009.
3. What is the effective date for
waiver of the public utility exception?
Answer: This provision is effective for
periods after February 12, 2008, in taxable years ending
after such date.
4. When is the ITC effective for
residential solar energy efficiency property?
Answer: The extension of the ITC for
residential solar energy efficiency property is
effective on the date of enactment, October 3, 2008.
Since the existing section 25D credit was not scheduled
to expire until December 31, 2008, this means that the
credit has been seamlessly extended through 12/31/2016.
5. What property qualifies for the
section 25D residential ITC?
Answer: The credit applies to "qualified
solar water heating property," (defined as "property to
heat water for use in a dwelling unit located in the
U.S. and used as a residence by the taxpayer if at least
half of the energy used by such property is derived from
the sun), and to "qualified solar electric property"
(defined as property which uses solar energy to generate
electricity for use in a dwelling unit located in the
U.S. and used as a residence by the taxpayer).
6. Does the elimination of the $2,000
cap on the section 25D residential credit
apply to solar thermal property?
Answer: No. The elimination of the
$2,000 cap applies only for qualified solar electric
property expenditures.
7. What is the effective date of the
elimination of the $2,000 cap for solar electric
property expenditures?
Answer: The elimination of the $2,000 cap for solar
electric property expenditures is effective for property
placed in service after December 31, 2008. State laws
dictate when in-state property is placed-in-service.
8. If I begin a residential
installation now, can the lifted cap apply to this
project
Answer: That depends on whether the
installation is completed after December 31, 2008.
Section 25D(e)(8)(A) provides in general that an
expenditure with respect to an item shall be treated as
made when the original installation of the item is
completed. In other words, the taxpayer may claim the
credit as of the date that the installation of the
residential solar electric property is completed and the
property is placed into service. If an installation is
begun in 2008, but the property is not placed into
service until after December 31, 2008, the taxpayer may
claim the credit for 30% of the expenditures made with
regard to the installation.
9. Why was the $2,000 cap not lifted
for residential solar water heating projects?
Answer: Although House and Senate staff
agreed to lift the $2,000 cap for solar water heating
projects, members of the Solar Thermal Division of SEIA
voted overwhelming to maintain the cap.
9. What is the effective date for
allowance of the solar ITC against the AMT?
Answer: The provision allowing
individual taxpayers to use the solar ITC against AMT
liability is effective for taxable years beginning after
December 31, 2007. Thus, individual taxpayers who are
required to pay alternative minimum tax liability
(rather than regular tax liability) for the
2008 tax year may take a credit of up to $2,000 (the
maximum credit amount for solar residential property
placed in service during 2008) against the AMT
liability. For the 2009 tax year, filers will be
eligible to apply the full 30% ITC against the AMT
liability.
10. Were the bonus depreciation
provisions enacted as part of the Economic
Stimulus Package earlier this year that are currently
set to expire on 12/31/08
extended as part of the Emergency Economic Stabilization
Act?
Answer: No, the bonus depreciation rules
were not extended. Bonus depreciation should not be
confused with the five-year accelerated depreciation of
solar property under Section 48.
Other Provisions
Benefiting Renewable Energy
Business Solar Investment Tax Credit
(IR Code §48). The bill extends the 30% ITC for
solar energy property for eight years through December
31, 2016. The bill allows the ITC to be used to offset
both regular and alternative minimum tax (AMT) and
waives the public utility exception of current law
(i.e., permits utilities to directly invest in solar
facilities and claim the ITC). The five-year accelerated
depreciation allowance for solar property is permanent
and unaffected by passage of the eight-year extension of
the solar ITC.
Residential Solar Investment Tax
Credit (IR Code §25D). The bill extends the 30% ITC
for residential solar property for eight years through
December 31, 2016. It also removes the cap on qualified
solar electric property expenditures (currently $2,000),
effective for property placed in service after December
31, 2008. The bill allows individual taxpayers to use
the credit to offset AMT liability, and to carry unused
credits forward to the next succeeding taxable year. The
$2,000 monetary cap on solar water heating property was
not lifted and remains
in effect.
New Clean Renewable Energy Bonds
(“CREBs”). The bill authorizes $800 million of new
clean renewable energy bonds to finance facilities that
generate electricity from renewable resources,
including: solar, wind, closed-loop biomass, open-loop
biomass, geothermal, small irrigation, qualified
hydropower, landfill gas, marine renewables and trash
combustion facilities. This $800 million authorization
will be allocated as follows: 1/3 will be used for
qualifying projects of State/local/tribal governments;
1/3 for qualifying projects of public power
providers; and 1/3 for qualifying projects of electric
cooperatives. The bill also extends the termination date
for existing CREBs by one year. Thus, State and local
governments, public power providers and electric
cooperatives will be allowed to issue CREBs to finance
new renewable electric power facilities, including solar
installations, through December 31, 2009.
Extension of Energy-Efficient
Buildings Deduction. Current law allows taxpayers to
deduct the cost of energy-efficient property installed
in commercial buildings. The amount deductible is up to
$1.80 per square foot of building floor area for
property installed in commercial buildings as part of:
(i) interior lighting systems, (ii) heating, cooling,
ventilation, and hot water systems, or (iii) the
building envelope. Expenditures must be certified as
being installed as part of a plan designed to reduce the
total annual energy and power costs with respect to the
interior lighting systems, heating, cooling,
ventilation, and hot water systems of the building by 50
percent or more in comparison to certain established
standards. The bill extends the energy efficient
commercial buildings deduction for five years, through
December 31, 2013.
Qualified Energy Conservation Bonds.
The bill creates a new category of tax credit bonds,
"Qualified Energy Conservation Bonds" (QECBs) to finance
State and local government initiatives designed to
reduce greenhouse emissions. QECBs can be issued to
finance capital expenditures incurred for: (1) reducing
energy consumption by at least 20%; (2) implementing
green community programs; and (3) rural development
involving the production of electricity from renewable
resources. The bonds can also be used to finance
research facilities and provide research grants for,
among other things, technologies to reduce peak use of
electricity. There is a national limitation of $800
million, allocated to States, municipalities and tribal
governments.
Research and Development Tax Credit.
The bill would extend the research and development tax
credit equal to 20 percent of the amount by which a
taxpayer’s qualified research expenditures for a taxable
year exceed its base amount for that year. The R&D tax
credit expired December 31, 2007. The provision would be
extended retroactively to January 1, 2008 and through
the end of 2009. In addition, the proposal would
increase the alternative simplified credit from 12% to
14% for the 2009 tax year, and repeal the alternative
incremental research credit for the 2009 tax year. The
proposal is effective for amounts paid or incurred after
December 31, 2007. Thus, research expenditures incurred
by the solar energy industry would qualify for the
credit.
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