Commercial Solar Energy Grants
Commercial solar energy projects that are started in 2011 are eligible for a renewable energy cash grant worth 30 percent of total project costs. Instead of taking the 30-percent tax credit, your business can instead opt to receive a solar grant from the Treasury. Don't miss out on this incredibly helpful solar grant program, which will sunset at the end of 2011.
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Federal Solar Incentive Overview
The two main commercial solar incentive programs available at the federal level are:
- Section 1603 Renewable Energy Grants. Project started in 2011 receive 30 percent payment from the Treasury no more than 60 days following solar energy system activation. After 2011,
- Accelerated depreciation + bonus depreciation (2010-2012). A 100% bonus depreciation is available for 2011; in 2012, the bonus portion of the accelerated depreciation schedule goes to 50%.
Beyond this, a number of state governments and municipalities offer tax abatements, solar rebates and other incentives that can significantly increase the ROI of a given commercial solar energy project. To learn more about the solar incentives available in your area, contact us.
30% Federal Investment Tax Credit (ITC)
Under U.S. Code Title 26 (Section 48(a)(3)), the federal government extends a corporate tax credit to businesses that invest in renewable power. The types of eligible solar technologies include: solar water heat systems, solar space heat, solar thermal electric, solar thermal process heat and photovoltaics (PV). The credit -- or grant (see above) -- is fixed at 30 percent. Note that the credit for businesses is not constrained by a dollar-value cap. So regardless of whether you install a $100,000 system or a $1 million system, your company is permitted to take a 30 percent credit. In October 2008 Congress voted to extend the ITC for eight years, through 2016.
Using the federal renewable energy credit with other incentive programs
If your company plans to take the federal credit in conjunction with other incentive programs, you should be aware of a couple of important considerations. As a general rule, most incentives represent income on which federal income taxes are paid. As a result, most incentives do not decrease the basis on which the federal ITC is calculated. For example, say your business receives rebate money from the state government. Because your business will pay federal income tax on this amount, it does not affect the cost basis used to determine the 30 percent investment tax credit. State rebates, buydowns, grants and other taxable incentives fall into this category.
There is a rare category of incentives, however, that is not taxable. An example is non-taxable rebates from utilities. Another is a non-taxable grant. When taking these types of incentives, your company will need to reduce the system's cost basis prior to calculating the ITC amount. Say your business receives $100,000 in non-taxable utility rebates (rare). When determining the ITC amount, your accountants would subtract $100,000 from the cost of the solar-energy system. They would then determine the credit on this adjusted cost basis. The key phrase here is "subsidized energy financing," which broadly applies to non-taxable energy incentives. The IRS defines subsidized energy financing as, "financing provided under a federal, state, or local program, a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy."
As a rule of thumb, if your company pays federal income tax on them, additional incentives won't reduce the ITC amount. Before making any decisions, however, it's important to know what is and what is not allowed. As such, if you have any doubt as to which category your particular state-sponsosred incentive falls under, be sure to check with the appropriate state program. The Database for Incentives for Renewables & Efficiency (DSIRE) is a useful resource that provides many of these contacts.
For more information, see the Solar Energy Association (SEIA) Guide to Federal Tax Incentives for Solar Energy (PDF).
Impact of solar tax credits on depreciation calculations
For federal tax purposes, the Modified Accelerated Cost-Recovery System (MACRS) program allows for accelerated depreciation over a period of 5 years. MACRS and the 30-percent investment tax credit are set up to make it easier to purchase a renewable energy system. Ironically, they aren't necessarily set up to make it easy to understand how the rules work (at least from a non-accountant perspective). Several points are relevant.
First, when it comes to calculating the depreciation on a commercial solar-energy system, the "tax depreciation basis" is a distinct value from the "tax credit basis." Essentially, you don't get to count the full 30-percent credit when determining the value to depreciate--or mark down--in the first year. If this were the case, a system costing $100,000 would be depreciated down starting from $70,000 ($100K - 30% credit). For legitimate reasons, the IRS has decided that counting the full value of the credit alongside accelerated depreciation would provide too much incentive.
Reasonably enough, rules do allow companies to apply half the value of the tax credit when determining the basis on which to calculate depreciation. As such, the tax depreciation basis that your company claims for the solar energy system is reduced by 50 percent of the tax credit amount. For example, Company A installs a commercial solar-electric system costing $100,000. The company's tax depreciation basis will be equal to project costs minus half the allowable credit: $100,000 - (50% x $30,000) = $85,000. You can see the difference between the tax credit basis and the tax deprecation basis in our examples.
The last point relates to earnings and profit. As you well know, gross income is reduced by depreciation (among other things) to arrive at net income. The greater the allowable depreciation in a given year, the lower the net income. The lower the net income--or profits--the lower the taxable dividends paid to shareholders. When figuring profits, a company may omit the downward basis adjustments (previously discussed) and base its calculations off the full cost basis of the system. For earnings purposes, the company in our example would determine depreciation on full $100K value of the system--regardless of whether the 30-percent credit was claimed. Assume that 5-year depreciation means 20 percent is taken each year. Twenty percent of $100,000 is $20,000; 20% of $70,000 is $14,000. It's clear that using the system's full value benefits companies for earnings purposes.
In practice, a company could lower its tax liability over the short term while investing in a solar-energy system that will drive long-term energy savings. From this view, it's clear the rules are designed to provide incentive for companies choosing to invest in renewable power. Finally, if your company resells the solar-energy system, the tax depreciation basis is used to calculate taxable gains or losses. The 30-percent federal credit does not affect the book depreciation basis.
Solar tax credit background
The Energy Tax Act of 1978 established a 15 percent tax credit for solar energy. Eight years later, in 1986, the Tax Reform Act cut the credit to 12 percent, and then to 10 percent in 1988. It remained at this level until 2005. Then, the Energy Policy Act of 2005 set up a new commercial and residential investment tax credit (ITC) for solar-energy systems and fuel cells. Residents are permitted to claim a 30 percent credit, up to $2,000. Businesses may also claim a 30 percent credit, but don't face an absolute dollar-value cap. The original credits were valid for 2006 and 2007, and were subsequently extended for an additional year by the Tax Relief and Health Care Act of 2007. As noted above, the ITC has been renewed by Congress through 2016.
As is always the case with Washington, taxes and rules are prone to change. Keep an eye on future energy legislation. And while the information here is a good starting point, be sure to consult the appropriate authorities to ensure that your company is in compliance with all binding rules and regulations.
Federal Incentives for Commercial Solar Tax Credit Examples