Tax Credits Federal (IRS) tax credit for eligible solar energy systems. Anyone who has purchased or is contemplating purchase of a solar energy system should consult with an account or the IRS for tax advice. The following information is provided for general information and is not tax advice.
For residential solar energy systems the tax credit is 30 percent of the cost of the system. There is no cap on the tax credit for solar electric systems. However, the individual is limited to a maximum $2,000 credit for spending on solar water heating property if it was placed in service prior to December 31, 2008. After December 31, 2008 the tax credit for solar water heating is 30 percent of the cost of the system (i.e., no cap).
If the system is included as part of construction of a new house, then the spending occurs when the taxpayer takes residence of the house.
For business solar energy systems (solar electric and solar domestic water heating) the tax credit is 30 percent of the cost and is also eligible for accellerated depreciation.
Systems must be placed in service between January 1, 2009 and December 31, 2016.
Systems designed to provide pool heating are not eligible for the tax credit.
For tax credit forms and instructions, visit the Internal Revenue website at www.irs.gov.
Solar rebates from utility programs for energy improvements on dwelling units are not considered taxable income – see Internal Revenue Code 136 below.
Some people receive bills reductions and/or ‘net metering’ arrangements from their local utility. These are not considered income. See excerpt from IRS Publication 525.
IRS Publication 525, page 33: ”If you are a customer of an electric utility company and you participate in the utilities conservation program, you may receive on your monthly electric bill either: a reduction in the purchase price of electricity furnished to you (rate reduction), or a nonrefundable credit against the purchase price of the electricity. The amount of rate reduction or nonrefundable credit is not included in your income.”
Internal Revenue Code Section 136
Sec. 136. Energy conservation subsidies provided by public utilities
Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.
(b) Denial of double benefit
Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed for, or by reason of, any expenditure to the extent of the amount excluded under subsection (a) for any subsidy which was provided with respect to such expenditure. The adjusted basis of any property shall be reduced by the amount excluded under subsection (a) which was provided with respect to such property.
(c) Energy conservation measure
(1) In general
For purposes of this section, the term ”energy conservation measure” means any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit.
(2) Other definitions
For purposes of this subsection -
(A) Dwelling unit
The term ”dwelling unit” has the meaning given such term by section 280A(f)(1).
(B) Public utility
The term ”public utility” means a person engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers. For purposes of the preceding sentence, the term ”person” includes the Federal Government, a State or local government or any political subdivision thereof, or any instrumentality of any of the foregoing.
This section shall not apply to any payment to or from a qualified cogeneration facility or qualifying small power production facility pursuant to section 210 of the Public Utility Regulatory Policy Act of 1978.
Solar Scam Alert: Tax Fraud
When financial inducements for consumers to consider solar for their homes was created in the late 90s, the California Energy Commission was careful to call the incentive a ‘buy-down’ rather than a ‘rebate.’ This was done partially to alert solar customer to the fact that the cost of alternative energy systems had been reduced (‘bought-down’). When a tax credit is earned for the installation of a residential thermal or photovoltaic system, it must be applied to the reduced cost of the project, after taking the ‘buy-down.’ The IRS is also very clear in its advice:
If you received a subsidy from a public utility for the purchase or installation of an energy conservation product and that subsidy was not included in your gross income, you must reduce the cost for the product by the amount of that subsidy before you compute your credit. This rule also applies if a third party (such as a contractor) receives the subsidy on your behalf. (IRS form 5695 instructions 2009). Note that the IRS includes a residential solar projects within the IRS’s definition of an energy conservation product.
It is made obvious throughout the IRS Tax Code (Title 26 ~25D) that any rebate in any form from anybody that reduces the final cost of a product or installation must also reduce the basis for the computation of the tax credit (the rules are different for businesses – see CalSEIA’s online summary under ‘Tax Credits’).
Taxpayers must use actual cost when figuring the tax credit credit.
Moreover, contractors and their salespeople/agents/representatives are prohibited from offering customer inducements or gifts to purchase solar systems (except if they are worth less than $5). See California Business & Professions Code 7157.
THE ACTUAL COST
The IRS defines and limits the qualifying costs for going solar:
(1) Qualified solar water heating property expenditure. The term “qualified solar water heating property expenditure” means an expenditure for property to heat water for use in a dwelling unit located in the United States and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun.
(2) Qualified solar electric property expenditure. The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.
These subsections are easy to interpret – the value of any gift or premium, or ancillary equipment installed, or home improvement provided as an inducement to any homeowner to buy a renewable energy property, does not qualify for a tax credit. Only the costs directly associated with the installation of a solar energy project will qualify as the basis for a tax credit. In fact, the value of any inducement must be subtracted from the cost basis of the system before the tax credit may be taken.
Mr. and Mrs. Goodwill have received a bid for a solar electric system that will include the installation of a deeply discounted air conditioner. Because the air conditioner’s price has been decreased substantially, it will be seen as an inducement whose value must be subtracted from the cost basis of the solar electric system. In no interpretation of the code would the solar tax credit be applied toward the cost, or any portion of the cost, of the air conditioner. (Note that the same reasoning would apply for any gifts such as a Prius, a trip to Hawaii or Las Vegas, or a third party rebate).
If a contractor, dealer, manufacturer or distributor offers ancillary products, gifts, premiums or rebates, this form of kickback or double-dipping may trigger an audit of not only the contractor but also potentially their customers. The buyer may not be aware of the fraudulent nature of this kind of offer, but that will be no protection against an audit.
CalSEIA is not providing tax advice, but simple guidance on the nature of the interplay between rebates and tax credit. You should consult your own tax specialist when considering the purchase of a solar energy property.