In order to spur the growth of renewable energy, and solar in particular, federal and state governments as well as utility companies have established programs to issue tax credits, rebates and other incentives to purchasers of solar power. Bonterra helps each of our clients identify available incentives and even helps with the paperwork!
Federal Tax Credit
The Federal government provides an Investment Tax Credit (ITC) of 30% for the purchase of a qualifying solar system. Qualifying solar systems include solar hot water systems used for domestic water heating or space heating, photovoltaic systems, and hybrid solar lighting systems. If you have questions regarding other types of solar or have questions in terms of what other expenses may qualify for the federal tax credit, please see a comprehensive FAQ from the Solar Energy Industry Association at www.seia.org. In order to determine the basis to be used in calculating the tax credit, the purchaser should use the gross amount paid for solar equipment. This number includes labor, so long as the labor was directly related to the installation of the solar equipment. Please note that solar pool heating systems do not qualify for the federal tax credit.
The federal investment tax credit was recently extended in 2008 for a period of 8 years and all caps that were in place limiting the amounts of credits available were removed.
If a purchaser cannot claim the entire 30% tax credit in the purchase year, the credit may be carried forward until 2016 for residential purchases.
Under the American Recovery and Reinvestment Act of 2009, commercial purchasers can elect to receive a 30% rebate in lieu of the tax credit. This grant is paid within 60 days from the date that the system is placed into service. In order to qualify for the grant, the owner must commence construction on the system in 2009 or 2010 and it must be placed in service by 2016.
In order to claim the federal tax credit, you must submit IRS Form 3468.
State Tax Credits
Like the Federal ITC, many states also offer tax credits in an effort to spur the growth of renewable applications. The tax credits differ by state, but in California, qualifying residential Solar Hot Water systems are eligible for a state rebate based on the system’s expected energy production. The average residential rebate is $1,500 with a cap of $1,875. Qualifying Solar Electric (PV) systems are also eligible for a state rebate based on the expected system output. This rebate various by utility company but is approximately 25% of the Systems costs.
Utility Rebates
Many states have begun adopting Renewable Portfolio Standards (RPS) which are state policies requiring electricity providers to obtain a minimum percentage of their power from renewable energy resources by a certain date. As of 2010, California’s RPS require utility company’s to produce 33% of their power from renewable sources by 2020. Due to these requirements, utility company’s often offer additional incentives for the purchase of qualifying solar systems.
Many utilities offer customers the option of taking an Upfront Incentive (UFI) or a Performance Based Incentive (PBI). A brief description of each is as follows:
Upfront Incentive (UFI) – Under the UFI, a utility company will pay a one-time incentive based on the expected system output of the system. There are organizations that certify the expected output of solar systems and the utility will require a system that has been certified by one of the governing bodies. Once the system is determined, the utility company will compute the expected output of the system based on the certification or rating of the system. Many times, the UFI is capped at a certain amount (e.g. $75,000 for commercial systems).
Performance Based Incentive (PBI) – Under a PBI, a utility company will make periodic payments to the owner of the solar system based on the actual production of the system. For example, if the utility agreed to pay $0.05 per kWh produced by a system and the system actually produced 10,000 kWh in a given year, then the utility company would pay the owner of the system $500 for that year. Typically the utility company agrees to pay the PBI for 10, 15 or 20 years, with higher rates per kWh being paid for longer agreements. For example, a utility company may offer a customer $0.05 per kWh per year for 5 years or $0.06 per kWh per year for 15 years.
Accelerated Depreciation
Commercial owners can recover their solar investment under the federal Modified Accelerated Cost-Recovery System (MACRS), which allows businesses to recover their investment in solar over 5 years.
Property Tax Exemption
Many states offer a 100% exemption on property taxes for the increase in value that property owners realize with the installation of solar power. Therefore, the solar system would not add to the assessed value in determining property taxes.
Sales Tax Exemption
Many states offer a sales tax exemption on the retail sale and installation of solar systems by contractors.
Other Incentives
State, Municipality and Utility Financing – Certain States, local municipalities and utility companies have begun offering long term, low interest financing for the purchase and installation of solar power. Where available, these loans typically cover 100% of the cost of solar systems.
In some areas, these loans can be included in a home’s property tax assessment and paid back over 20 years or more. With low, fixed rates, the cost to own solar power is typically less than the savings from the systems, thus providing positive cash flow for the owner.
