Tax Incentives for Comm Customers

OVERVIEW

  • The solar investment tax credit (ITC) is a tax credit that can be claimed on federal corporate income taxes for 30% of the cost of a solar photovoltaic (PV) system that is placed in service during the tax year.1 (Other types of renewable energy are also eligible for the ITC but are beyond the scope of this factsheet.)
  • A solar PV system must be placed into service before December 31, 2016, to claim the 30% ITC—the tax credit will decrease to 10% starting in 2017.
  • For solar PV systems installed on or after October 4, 2008, there is no maximum amount that can be claimed through the ITC, and it may be used to offset either income taxes or alternative minimum taxes.
  • Typically, a solar PV system eligible for the ITC can also use an accelerated depreciation corporate deduction.

ELIGIBILE PROJECTS

To be eligible for the 30% business ITC, the solar PV system must be:

  • ‘Placed in service’ between January 1, 2006, and December 31, 2016 (i.e., construction and installation is complete, the taxpayer gains legal title and control of the system, all required licenses and permits for operating the system are obtained, and pre-operational tests show that the equipment works2 )
  • Used by someone subject to U.S. income taxes (i.e., cannot be used by a tax-exempt entity like a charity)
  • Located in the U.S. (but not U.S. territories unless owned by a U.S. corporation or citizen)
  • New and not previously used equipment
  • Not used to generate energy for heating a swimming pool

ELIGIBLE EXPENSES

The ITC is calculated by multiplying 30% by the “tax basis,” which is the amount invested in eligible property. Eligible property includes the following expenses related to a solar PV system:

  • Solar PV panels, solar curtain walls, and sales and use taxes on the equipment
  • Installation costs and racking
  • Step-up transformers, circuit breakers, and surge arrestors
  • Energy storage devices, 3 power conditioning equipment, and transfer equipment

ACCELERATED DEPRECIATION & THE DEPRECIATION BONUS

A taxpayer that claims the commercial ITC for a solar PV system placed in service can typically also take advantage of accelerated depreciation (aka the Modified Accelerated Cost-Recovery System, or MACRS) to reduce overall cost of a PV installation. To calculate income on which federal corporate taxes are owed, a business takes the difference between its revenues and expenses, plus or minus any adjustments to income. Because depreciation is considered an expense, having a larger amount to depreciate during the tax year results in a smaller overall tax liability. Note, whereas the ITC is a tax credit—a dollar-for-dollar reduction in taxes owed—depreciation is a deduction, meaning it only reduces a business’s taxes by the depreciation amount multiplied by the business’s tax rate (see below for an example).

When the commercial ITC is claimed, accelerated depreciation rules allow 85% of the tax basis to be depreciated over a 5-year period (where any unused depreciation can be carried back 2 years and forward 20 years) on a 200% declining balance basis. This means that the 85% of solar PV system costs that a business can depreciate are not spread out evenly across the 5-year depreciation period; instead, the business is allowed to deduct a larger portion of this amount in earlier years, giving it the benefit of a greater immediate reduction in federal tax liability.

CLAIMING THE INVESTMENT TAX CREDIT

To claim the ITC, a taxpayer must fill out and attach IRS Form 3468 to their tax return. Instructions for filling out the form are available at http://www.irs.gov/pub/irs-pdf/i3468.pdf.


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