Federal renewable energy tax credit examples
NOTE: these examples draw heavily from the SEIA Guide to Fed Tax Incentives (see Page 1)
Example 1: System Purchase and Installation in 2008
A company spends $100,000, including labor and equipment, to install a PV system. The panels are purchased and installed in 2008.
Total project costs*: $100,000
2008 tax credit basis: $100,000
2008 tax credit amount: $100,000 x 30% = $30,000**
2008 tax depreciation basis: $100,000 x (30% x 50%) = $85,000
* Both the purchase and installation are fully qualified under the credit
** Tax credit basis is multiplied by the 2007-08 tax credit
*** The depreciation basis must be reduced by half (50%) to reflect the tax credit
Example 2: 2008 Purchase, 2009 Installation
A company OK's a $1,000,000 solar project in Q2 2008. The equipment, representing 80 percent of the total costs, is purchased in 2008. Installation occurs in 2009, representing the remaining 20 percent of project costs.
2008 tax credit basis: 80% x $1,000,000 = $800,000
2009 tax credit basis: 20% x $1,000,000 = $200,000
2008 tax credit: $800,000 x 30% = $240,000
2009 tax credit*: $200,000 x 30% = $60,000
Total credit** = $300,000
Depreciation basis = total costs - (total credits x 50%)
= $1,000,000 - ($300,000 x 0.5) = $850,000
* The tax credits are realized on a "progressive payments" basis, and the company must have a tax burden sufficiently large to realize the credits
Example 3: Commercial Credit, Followed by System Resale and Recapture
In 2008, Company X spends $100,000 to purchase and install a PV array. Three years later, in 2011, the solar-energy system is sold on to Company Y. Company X must recapture the unvested portion of the tax credit that it claimed in 2008, when the system was first purchased.*
2008 tax credit basis: $100,000
2008 tax credit: $100,000 x 30% = $30,000
Recapture basis: $30,000 x 40% = $12,000
*NOTE: As stipulated by the IRS, although the business energy credit may be used in the first year, they vest at a rate of 20 percent over five years. Without this provision, a company could, in theory, simply purchase PV arrays with the 30 percent credit and resell them. The 5-year vesting provision stipulates that any unvested part of the credit be recaptured--i.e., paid back to the IRS. In this example, when Company X resells the system, the credit has only vested in 2008, 2009 and 2010--leaving 40 percent unvested. Accordingly, Company X must report this "recapture income" ($12,000) as part of the ordinary income resulting from the system's sale to Company Y.
Related reading:
Federal Incentives for Commercial Solar Tax Credit Examples |
