October 17, 2016
The Tax Benefit of Solar Panels via the Energy Credit
By Christina Zirbes, Manager, Tax & Business
In today's political climate, environmental sustainability and energy alternatives are a hot topic of debate. As such, many businesses have taken initiatives to "go green." One increasingly popular energy alternative is the installation of solar panels. Solar panels serve the dual purpose of being an easy and effective sustainable alternative while also significantly reducing energy bills. Long-term, the savings generated usually outweigh the upfront out-of-pocket costs of installation. What companies may not know is that there is also a significant tax benefit available for taxpayers who install solar panels.
The Business Energy Investment Tax Credit ("Energy Credit") is available to taxpayers that meet the criteria on the installation of certain types of energy properties. This credit is a dollar-for-dollar reduction of the taxpayer's tax liability. It is non-refundable (it cannot reduce the tax liability below zero); however, the taxpayer can carry forward any unused tax credit for up to 20 years.
Solar property is the most common type of energy property available under the energy credit. Four different types of solar property qualify:
- Solar property which generates electricity;
- Solar property which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight;
- Solar property which is used to heat or cool a structure; and
- Solar property which provides solar process heat (except for purposes of heating a swimming pool).
In order to qualify as energy property, the property must:
- Meet the performance and quality standards, if any, that have been prescribed by regulations and are in effect at the time the property is acquired;
- Be property for which depreciation is allowable;
- Be property that either:
- Is originally constructed by the taxpayer, or
- If acquired by the taxpayer, commences original usage with the taxpayer; and
- Be operational in the year the credit is taken.
If the solar property meets all of the requirements as described above, the calculation of the credit is rather simple. For solar property, for the year ending December 31, 2016, the credit is 30% of the cost of the system. There is no maximum for this credit. In addition, the depreciable base of the system must be reduced by 50% of the energy credit.
As an example, if the system costs $100,000, the taxpayer would generate an Energy Credit of $30,000 for use in the tax year. However, the taxpayer would only be able to depreciate $85,000 [$100,000 less $15,000 (50% of the $30,000 credit)].
There are some other items to note regarding the energy credit. The credit is not available for leased solar panels. There are also special rules for taxpayers that receive certain incentives for the installation of their energy property, that incur certain types of related expenditures, or that take certain other related tax credits. Lastly, there are five other types of property in addition to solar property, that are more rarely seen but that also qualify for the energy credit: geothermal property, fuel cell property, microturbine property, small wind energy property, and combined heat and power system property. Any taxpayer installing these types of property should also consider the benefit of the energy credit.
Recently, the Solar Energy Credit, which had expired, was extended to the year ending December 31, 2023; however, the credit percentage will be phased down gradually over that time span. For the years ending December 31, 2016 to 2019, the energy credit for solar property is equal to 30% of the system cost. For the year ending December 31, 2020, it will be 26%; December 31, 2021, 22%; and December 31, 2022, and forward, only 10%.
The earlier the taxpayer can install the solar property, the greater the tax benefit available. Any taxpayer thinking of installing solar panels for their business should take a closer look into the tax benefit of the Energy Credit. In many cases, this credit is an unexpected afterthought that can save taxpayers a good deal of money. Also of note is that the energy credit is not exclusive to businesses. It is also available for individuals who install solar panels on their homes. Business and individuals, alike, should consult with their tax advisors or contact Marcum in order to determine if the solar panels they are installing can also save them tax dollars.