Until recently, I assumed that federal tax
credits for PV systems were based on
the net cost of the system after subtracting any utility rebates. But a newsletter I
received indicates that the 30% investment
tax credit is based on the total PV system
cost, before subtracting the state incentive.
Is this accurate?
This depends on whether your
customer is a homeowner or a
business. The distinction hinges on
the terms personal tax credit and
investment tax credit. The Database
of State Incentives for Renewable
Energy (DSIRE) makes this distinction,
for example. On the DSIRE Web site
(dsireusa.org), the “Residential Renewable Energy Tax Credit” is described
as a personal tax credit, whereas the
“Business Energy Investment Tax
Credit” is identified as a corporate
tax credit. Personal and corporate tax
codes are quite different, specifically
with regards to the way one accounts
for utility rebates.
Homeowners.
For most homeowners
who purchase a grid-tied PV system,
there are two principal financial incentives: a rebate and the federal tax credit.
The rebate is usually available from
the utility to which the system is connected. The federal tax credit takes
the form of a personal tax credit (PTC)
that is available to the homeowner.
When a rebate is available from
the utility company, the rebate is
treated as a purchase price reduction. This means that the value of
the rebate is subtracted from the
total purchase price, resulting in a
net adjusted cost for the purposes of
determining the value of the federal
tax credit. So, for homeowners the
value of the PTC is calculated as
follows, where P is the purchase
price and R is the rebate amount:
PTC = (P – R) x 30%
Prior to January 1, 2009, the federal
tax credit for homeowners was capped
at $2,000. This made for pretty simple
math, since this cap was reached on
all but the smallest PV systems. For
example, assuming a rebate of $3.50
per watt, a purchase price of $12,750
($8.50/watt) and a 2008 placed-in-service date, the $2,000 cap for the
Residential Renewable Energy Tax
Credit is exceeded even on a 1.5 kW
grid-direct PV system:
PTC = ($12,750 – $5,250) x 30%
PTC = $7,500 x 0.30
PTC = $2,250 ≥ $2,000 cap
With the passage of the Emergency
Economic Stabilization Act of 2008,
the $2,000 cap on the PTC for PV
systems was lifted, and tax credits for
solar were extended for 8 years. Residential grid-tied PV systems installed
between January 1, 2009 and December 31, 2016 qualify for a full 30% tax
credit. For a 5.6 kW PV system with a
purchase price of $46,200 ($8.25/watt)
and a 2009 placed-in-service date, an
additional $5,980 PTC ($7,980 - $2,000)
results compared to a 2008 placed-in-service date, under the same $3.50 per
watt rebate:
PTC = ($46,200 – $19,600) x 30%
PTC = $26,600 x 0.30
PTC = $7,980
Two items are worth noting before
we look at how the federal tax credit
is calculated for businesses. First,
according to version 2.0 of the Solar
Energy Industries Association (SEIA)
Guide to Federal Tax Incentives for
Solar Energy, “Most rebates from state
governments or non-profit organizations do not reduce the basis for the
federal credit.” So make sure you know
where your rebate comes from and
its tax classification. Second, dwelling
units with a home office serve a dual
residential and commercial purpose.
So while depreciation in general is
unavailable to homeowners, those
with an in-home business may be able
to depreciate the portion of the PV system that qualifies according to the IRS
as commercial property, usually on the
basis of a square foot determination.
Businesses.
In addition to rebates
and federal tax credits, commercial
customers who purchase grid-tied PV
systems are also entitled to a third
major financial incentive: depreciation. Depreciation is a mechanism for
spreading out the cost of acquiring
large capital items over time. Solar
projects, even though they have a
25-year service life, qualify for 5-year
accelerated depreciation. Furthermore, systems placed in service in
2008 and 2009 also qualify for bonus
depreciation. These PV systems are
still depreciated over 5 years, but they
can take 50% the first year and 12.5%
in each of the succeeding 4 years.
Originally, the bonus depreciation of
50% in year one was available only
for systems placed in service in 2008,
and it expired on January 1, 2009. But
the American Recovery and Reinvestment Act, signed into law by President Obama on February 17, 2009,
reinstates bonus depreciation for PV
projects completed in 2009.
Unlike the PTC, the commercial
tax credit--usually referred to as the
investment tax credit (ITC)--can
be calculated in two different ways.
The first process is the rebate-first
method, which is the same as for
homeowners. In this case, the busi-
ness subtracts the rebate amount
from the purchase price of the PV
system and uses the net difference
to determine the ITC amount. The
second approach is the ITC-first
method. In this case, commercial
property owners apply the ITC to the
full purchase price first and then treat
the rebate as taxable income. This is
the method mentioned in the newsletter you received. The formula for calculating the ITC in this case is simply
to take 30% of the purchase price:
ITC = P x 30%
The ITC-first method results in
a larger basis for the tax credit and
for the 5-year accelerated depreciation plus bonus depreciation. If the
business reduces the purchase cost
of the PV system by the value of the
utility rebate, then the depreciation
is based on this adjusted value. If the
business does not reduce the system
cost by the value of the utility rebate,
however, then depreciation is based
on the nonadjusted purchase price.
This results in a significantly larger
depreciable basis.
In either case, before depreciation
is calculated, it is necessary to first
reduce the purchase price by one-half
of the value of the federal tax credit.
So using the rebate-first method
of accountin--the purchase price
reduction method--the depreciable
basis (DB) for a 12.5 kW PV system
sold to a business for $100,000 ($8.00/
watt) with a $3.50 per watt rebate is
calculated as follows:
DB = (P – R) – (0.5 x ((P – R) x 30%))
DB = ($100,000 – $43,750) –
(0.5 x (($100,000 - $43,750)
x 30%)
DB = $56,250 – (0.5 x ($56,250
x 0.3))
DB = $56,250 – (0.5 x $16,875)
DB = $56,250 – 8,437.50
DB = $47,812.50
Compare this to the depreciation
basis using the ITC-first method of
accounting:
DB = P – (0.5 x (P x 30%))
DB = $100,000
– (0.5 x ($100,000 x 0.3)
DB = $100,000 – (0.5 x $30,000)
DB = $100,000 – $15,000
DB = $85,000
The ITC-first method results in
a much more attractive basis for
depreciation. It also leverages a larger
federal tax credit. But does it actually
provide the best financial return?
As illustrated in Table 1, the ITC-
first method does indeed provide the
most favorable return. This leverages a
$30,000 tax credit, as well as depreciation totaling $22,848 (assuming a 28%
marginal tax rate and a 4% discount
rate.) This requires that the business
treat the $43,750 rebate as taxable
income, but the tax on the rebate is
only $12,250 ($43,750 x 28%). Taking
the rebate first leaves $23,121 on the
table (($30,000 + $22,848) – ($16,875 +
$12,852)). Therefore, taking the ITC first
and taxing the rebate nets the business
nearly $11,000 in this example.
This is the reason that the newsletter you received recommends taking
the ITC on the total PV system cost.
In his excellent article “Payback and
other Financial Tests for Solar Elec-
tric Systems,” Andy Black of OnGrid
Solar (ongridsolar.com) confirms this
approach. He notes, “While it might
seem obvious to avoid the rebate tax
... it is actually financially more attractive to claim the rebate as taxable,
pay the tax, then claim a higher basis
for each of the federal tax credit and
depreciation.”
Please note that this review of
incentives is based on information
contained in the Federal Tax Code
and bills recently signed into law. This
is not to be construed as tax advice.
Always consult a tax professional.
SEIA members can download the tax
manual for free from its Web site at
seia.org.
Source:—Peter Parrish, Ph.D. / California Solar
Engineering / Los Angeles, CA / calsolareng.com
The author wishes to thank Sue Kateley of CALSEIA for her
input and review of this article.