The reason the government is trying to help us through the maze is that we never used to have all these choices. The choices are brand-new, dating only to President Obama’s economic stimulus package (ARRA 2009), which included about $40 billion for clean energy initiatives. Relying purely on tax-based incentives to incentivize a market that badly needs the growth doesn’t work so well when companies are experiencing heavy losses in a recession, reducing or totally eliminating their tax burden. Hence, a company that previously had only MACRS and the 30% ITC can now opt to change out the ITC for a PTC, or even–for a short time only, to be a real shot in the industry’s arm–the equivalent amount of the ITC in cold hard cash. The report explains:

Because the two credits are structured differently, and apply in different ways to different technologies, the choice between the two lends itself to quantitative financial analysis of the conditions under which either the PTC or the ITC would, at least in theory, provide greater financial value. Qualitative considerations may be equally important, however, particularly in instances where quantitative differences are modest.

It boils down to how dire your straits are. The PTC is potentially more lucrative than the 30% cash grant, depending on how well the market performs over the ten years during which the PTC will be viable, but well, who doesn’t love cash in hand? The report authors note that those companies able to venture out onto a limb a bit might find the idea of a healthy production credit alluring, but…

…some developers and project owners will nevertheless prefer the certainty offered by the ITC over the performance risk inherent in the PTC – even if the PTC promises a higher expected value.

Another big factor is how long the owner of a renewable energy system expects to hang on to it. If you’re going to sell within five years, the PTC makes more sense, as it’s an incentive that provides immediate value to new purchasers. The cash (or ITC, if you go old-fashioned on us) is applied over a 5-year period–and once it’s gone, it’s gone, providing little in the way of a carrot to potential buyers of the system. The ITC or cash, however, will be more appealing to those projects than want to take advantage of low-interest government loans to help finance the project; these are combinable with the ITC/cash, but not with the PTC.

The report doesn’t detail solar–it focuses on quantitative and qualitative analysis for wind, biomass, geothermal, and landfill gas, since these are the technologies that stand to gain most from the PTC for which solar is not eligible. But becoming intimately familiar with them is the best way to decide how best to take advantage of federal support for your solar installation–it pays to know the whole picture.

Thanks to Renewable Energy World for pointing this out. And download the full report here (PDF).

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So if you’ve been wondering if your business could make solar look good on the books, this may be your chance to watch those numbers jump from red to black. Spend some time on GetSolar.com learning about the benefits of commercial solar installations, and refer to DSIRE for complete details on the new grant. Or jump right to our informational web form, and someone from our friendly GetSolar.com team will get in touch with you to walk you through your company’s options. Be a good American and help out the economy…and get a great value renewable energy system that will save your company money and reduce your exposure to energy price inflation in the coming years.

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[DISCLAIMER: I am not a tax professional. In fact, I know very little about federal tax laws. The closest I come to the stuff is via TurboTax, each spring. In sum, you'd be a fool to assume that this post should be taken as tax advice. It should not be taken as such, and its accuracy is not guaranteed. Contact a tax attorney if you want legal advice on your tax situation.]

Anyway, the short answer is that a tax credit reduces your federal tax liability directly. Subtracted from your tax liability (taxes owed), it’s taken after all other reductions are made. A tax deduction, by contrast, provides tax relief in a more oblique manner. Tax deductions are subtracted  from gross income, yielding taxable income — the basis from which your tax liability is calculated. An example sheds some light:

For simplicity, assume that this year you have an income of $100,000 and are in the 30 percent tax bracket. Come April 15th, 2010, you’d owe the feds $30,000 (ignoring deductions and other factors that affect your taxable income).

Now, imagine that in 2009 you install a solar PV array costing a total of $30,000. Under current ITC rules, you’d be permitted to take a 30-percent tax credit worth $9,000 (30% x $30,000 = $9,000). Since it’s a credit, you’re permitted to subtract this amount directly from your tax liability: $30,000 – $9,000 = $21,000 in taxes owed, thanks to the ITC.

What would things look like if the feds offered a 30-percent tax deduction instead of a credit? The outcome is not as promising. As noted above, tax deductions are taken before arriving at taxable income, which is then used to determine your tax liability. In our example, that would look like this:

$100,000 – $9,000 (30-percent tax deduction) = $91,000 (this is your new taxable income, ignoring all other deductions)

$91,000 x 30% = $27,300 in taxes owed

Clearly, the tax credit provides stronger incentive for residents (and firms) to invest in solar PV systems. In our example, the credit would save you $6,300 when compared to the hypothetical tax deduction. Further clarity is provided by this simple post from the Financial Web,

Tax credits can be more valuable than deductions, although somewhat more difficult to qualify for. Let’s assume, for example, that you owe $1,000 in tax. For the purposes of this illustration, you are eligible for either a $1,000 tax deduction or a $1,000 tax credit. Which would you choose? Well, the deduction, when subtracted from your gross income to get your taxable income, will only decrease the tax you owe by about $10. The tax credit would be subtracted directly from the tax you owe, which would mean that you owe no tax at all.

I hope this post provides some clarity on these topics. If you’ve got any questions or suggestions, please don’t hesitate to contribute.

Finally, the Solar Energies Industry Association (SEIA) provides a number of useful resources on the ITC and other federal initiatives.

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What seems to be happening is that it’s suddenly way cool to be involved with renewable energy on Capitol Hill. Consider the last administration’s treatment of climate change and insistence on using our fossil fuel resources to the last drop: this is a sea change for Washington. And the Obama administration, not even 48 hours after the inauguration, approved $20 billion in tax credits & other incentives for renewable energy as part of Obama’s economic stimulus package. (Yesterday, in related news, Adam talked about how Washington is reconsidering the ITC in favor of direct grants.) So he’s willing to put his money where his mouth is, concerning renewables–if you were holding your breath, I think you can let it out now.

See US News & World Report

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It’s pretty easy to see, more or less, how a 30-percent credit would effect your own bottom line for a single system. (0.3 x total costs = federal tax incentive.) But what will the overall effect be over the course of 2009? I’ve yet to come across reliable figures, so I’m calling on you, our readers, to help us figure out roughly how much “stimulus” will come from removing the $2,000 cap. Obviously, it’s pretty difficult to project how many residential systems will be sold in 2009 — while it’s unclear when growth will return to the broader economy. And any added extra cash that’s put back in the system from the ITC program will doubtless be but a drop in the bucket. Nevertheless, I’m interested to see what you guys come up with, and I’m confident a decent estimate can be made.

Post your guesses, and we’ll follow up next week.

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After being voted down no fewer than seven times by the House of Representatives (and ten in the Senate), the bill to extend renewable energy tax credits past 2008 has finally passed. President Bush has said he will sign the bill, so the future looks–well, sunny.

The bill maintains the 30% tax credit for commercial installations of eligible renewable energy technologies, like solar and wind, and does something of momentous importance to the average citizen: it continues to extend that 30% credit to residential customers while removing the cap of $2,000 the previous legislation had imposed. Up until now, if you wanted to install solar in your home and spent $40k on a system, you could only claim a $2k tax credit federally; now, you’ll be able to claim the full $12k. It’s a huge stride forward in encouraging residential adoption of renewables.

And it’s amazing news for utilities, which under the 2005 legislation were not able to benefit from this credit but now can. This will hopefully lead to utility-scale renewables finally finding purchase in states where the finances simply were not appealing when compared to tax breaks the utilities could get for developing coal, oil and gas. The news isn’t quite as good for wind, whose ITC’s were only extended for one year, as opposed to solar’s remarkable eight.

What changed the fate of this legislation, whose future looked so bleak not even a week ago? It got bundled into the emergency bailout legislation intended to alleviate our current financial crisis. It seems that the urgency of the bailout plan, along with its expectation that the parties would be doing everything in their power to find common ground, gave it just the push it needed to finally move forward. Divided along party lines as recently as Monday, Congress decided to go through with the $700 billion bailout due to the prevailing sense that the economy had no other effective route to recovery. On Monday, the vote was 228-205; today, it was 263-171. The Senate, after rewriting the bill to include the renewable energy legislation, passed it on Wednesday night by a wider margin of 74-25.

Visit the Solar Energy Industries Association (SEIA) to learn more about what this means for the solar industry in America. What we’ve been handed is the ability to maintain our competitive edge in the global solar market, and to pursue strategies of energy independence here at home.

And also–huzzah!

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