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Tax Credits & Incentives - Solar Panels


The following listing provides information on a variety of select business incentives, some of which are tax credits or exemptions while others are non-tax incentives.

I. Energy Credit

Solar energy property qualifies for the Energy Credit. The Credit is equal to 30% of the cost of the solar energy property placed in service during the tax year. Solar energy property is equipment that satisfies two tests. The first test is satisfied if the equipment uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat. The second test is met if it is not used to generate energy for heating a swimming pool. A permanently installed active solar energy system that supplements an existing oil-fired hot water system also qualifies as solar energy property.

There are additional requirements in order for solar energy property to qualify for the Credit.

First, if the property is acquired by the taxpayer rather than constructed, the use by the taxpayer must be the original use of the property.

Second, the property must be of a type for which depreciation is allowable.

Third, the property must meet any performance and quality standards prescribed by the IRS after consultation with the Department of Energy that are in effect when the property is acquired. The taxpayer need not wait for issuance of quality and performance standards before proceeding with the acquisition of the property.

Fourth, the property must not be used outside the United States or for lodging.

The Credit will provide a one-for-one reduction of tax liability. The Energy Credit is combined with other credits to comprise the General Business Credit. Utilization of the Energy Credit and certain of the other components of the General Business Credit are limited to 100% of the taxpayer’s tax liability up to $25,000 plus 75% of the excess of the taxpayer’s tax liability over $25,000. The Energy Credit is fully creditable, as calculated above, against both the regular tax liability and the alternative minimum tax liability. This limitation will not be applied at the S Corporation level, but will apply at the shareholder level separately to each shareholder in the amount described above.

The depreciable basis of the solar property will be reduced by 50% of the Energy Credit amount.

II. Grant In Lieu of Energy Credit

The Treasury Department is authorized to issue grants to qualified taxpayers who apply in lieu of the Energy Credit. A qualified taxpayer is a taxpayer who places in service depreciable or amortizable property that is otherwise eligible for the Energy Credit.

The amount of the grant is determined by the Treasury Department. The grant is not includible in gross income for federal income tax purposes.
The grant is available only for specified energy property, including solar property, that is placed in service in 2009 or 2010 or the construction of which began in 2009 or 2010 that is placed in service after 2010 but before the credit termination date. The credit termination date is January 1, 2017 for solar property.

The depreciable basis of the solar property is reduced by 50% of the grant amount.

The Treasury Department must receive the grant application before October 1, 2011, and must make the grant payment during the 60-day period beginning on the later of: (1) the date of the application for such grant; or (2) the date the specified energy property for which the grant is being made is placed in service.

III. Deduction for Energy Efficiency Improvements

A taxpayer may deduct the cost of certain energy efficient improvements installed on or in a depreciable building before January 1, 2014. Energy efficient property is defined as depreciable property installed as part of a building’s
  (1) interior lighting systems,
  (2) heating, cooling, ventilation and hot water systems, or
  (3) building envelope as part of a certified plan to reduce total annual energy and power costs of these systems by at least 50% in comparison to a reference building that meets specified minimum standards. The minimum standards are determined by certain software that is required to be used by the Department of Energy. The certification produced by the software must be maintained as part of the taxpayer’s records.

The deduction is limited to the total square footage of the building times $1.80. There is also a lesser deduction at $0.60 per square foot for property that meets certain other energy savings targets.

The 50% of basis of the solar equipment remaining after reduction for the Energy Credit may qualify for this deduction. The depreciable basis of the property is further reduced by this deduction.

IV. MACRS Depreciation

Any property eligible for the Energy Credit is considered to be five-year class life MACRS property.

As five-year property, the solar panels are eligible for 200% declining balance MACRS depreciation. However, 150% declining balance or straight-line may be elected but must be used for all property in the five-year class that is placed in service during the same year.

Currently, there is no provision in the tax law for bonus depreciation for property placed in service after 2009 except for some limited categories. There has been discussion in Washington of extending the bonus depreciation provisions for 2010. However, there are no formal proposals at this time. Under previous bonus depreciation rules, qualifying property was property subject to MACRS depreciation with a recovery period of 20 years or less. Therefore, your solar panels are of the type of property that would have qualified under previous bonus depreciation rules and of the type that would be expected to qualify if bonus depreciation is extended for 2010.

The section 179 expensing election applies to tangible personal property which is depreciable under MACRS. Tangible personal property is tangible property which is not land, a building or property that is permanently affixed to a building. If your solar panels meet this definition, then they would initially be eligible for the section 179 expensing election. However, there are various limitations with regard to the section 179 expensing election such as an investment threshold and a taxable income limitation which may make the section 179 expensing election unavailable to you.

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