Solar Energy Tax CreditsDecember 10, 2012
Renewable energy tax credits reduce cost of purchasing and installing a new system.
If you are thinking about installing a new renewable energy system in your business, particularly one that uses solar energy, there is good news. There are some tax benefits that will reduce a good portion of the cost of buying and installing the new system. This is done through an income tax credit and depreciation deductions.
Description of the Credit
The credit can be claimed by an owner of depreciable energy property placed in service during the year. Energy property is property whose original use begins with the taxpayer, and uses solar energy to generate electricity, heat or cool a structure, or illuminates the inside of a structure using fiber-optic distributed sunlight. The credit can be taken on property which is depreciable and meets certain government standards. The property must be placed in service prior to December 31, 2016.
Computation of the Credit
The credit equals 30% of the cost of the energy property placed in service during the year. The cost basis of the property on which the credit is claimed is reduced by 50% of the credit, with the remainder available for depreciation expense under the same rules as other equipment purchases.
Limitations on the Credit
The credit is a dollar for dollar reduction of tax and is limited such that net income tax cannot be reduced below zero. The unused portion of the credit will then be carried back one year and forward 20 years.
Alternative Minimum Tax (AMT)
The solar credit is a specified credit that can be used to offset AMT without limitation in the year placed in service. However, carrybacks and carryforwards may be subject to certain AMT limitations. (your tax advisor will need to do a detailed calculation in accordance with the facts and circumstances at the time)
Recapture of the Credit
The energy credit is subject to a five-year recapture rule. The amount recaptured is reduced by 20% for each year the qualifying property is kept in service. i.e. if the solar property were taken out of service in year 3 – then 40% of the previously claimed credit would be added to tax in the year service terminated. (there are special rules for catastrophes such as a major collision)
The credit is taken using Form 3468 (Investment Credit). If there are other credits, carrybacks, or carryforwards, then the energy credit is also carried to Part III of Form 3800 (General Business Credit).
State Credits / Incentives
There are numerous state tax credits and grant programs relating to renewable energy. These vary from state to state and have time limits and rules that are completely independent of the Federal rules outlined above. If you would like to know more about the incentives available for a particular state or states, please contact us so we can discuss the details.
This is an outline of general guidance and terms surrounding renewable energy incentives. Please contact Norman LeBlanc, CPA/MST or any member of our Tax Services Team to determine the full impact that these rules have on your particular situation and set of facts.
Learn more about the RI Renewable Energy Growth Program here.
KLR’s tax professionals are CPAs and attorneys who have specialized training and experience in the Boston market place in all matter of Federal, State and Local Tax Issues. They have expertise in compliance reviews, nexus studies, voluntary disclosure issues, transfer pricing, M&A assistance, cost segregation studies and research & development, film and energy tax credits.