Federal Solar Energy Tax Credits
Established in the federal Energy Policy Act of 2005, the solar energy tax credit provides a 30% federal income tax credit for solar energy equipment and installation expenditures associated with qualified commercial systems, such as solar photovoltaic and solar water heating systems as well as certain solar lighting systems. The federal tax credit is a dollar-for-dollar reduction of federal income tax liability.
Qualifying equipment will use solar energy either to generate electricity, to heat/cool or provide hot water to a structure, to provide solar process heat, or to illuminate the inside of a building by means of fiber-optic distributed sunlight. Public utility property, passive solar systems, and pool heating equipment are not eligible for tax credits.
In order to qualify for the solar energy tax credit, the original use of the equipment must begin with the taxpayer or it must be constructed by the taxpayer. Also, the equipment must meet any performance and quality standards in effect at the time the equipment is acquired.
These tax credits can be either used to offset the system owner's federal tax liability or transferred to a corporate investor in exchange for additional equity capital that can be utilized for long-term financing of the system. Because the Internal Revenue Code's Passive Activity Rules severely limit and, sometimes, prohibit the use of tax credits by individuals, system owners syndicate the tax credits to a third-party corporate investor who can utilize the tax credits via a multi-tier lease transaction ownership structure.
The solar energy system must be operational in the year in which the tax credit is first taken. The solar energy tax credits can be used to reduce Alternative Minimum Tax (i.e., AMT reductive) within the limitations of the Internal Revenue Code's Passive Activity Rules.
If the project is financed in whole or in part by subsidized energy financing or by tax-exempt private activity bonds, the basis on which the tax credit is calculated must be reduced. Subsidized energy financing means "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." Therefore, a taxpayer must reduce the basis for calculating the credit by the amount of any such incentives received.
For eligible equipment installed and "placed in service" from January 1, 2006 through December 31, 2016, the investment tax credit is set at 30% of solar technology expenditures.