New Tax Credits for Installing Solar Thermal and more!

Business Energy Tax Credit

Last DSIRE Review: 10/16/2008
Incentive Type: Corporate Tax Credit

Eligible Renewable/Other Technologies: Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Wind, Biomass, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, CHP/Cogeneration, Solar Hybrid Lighting, Direct Use Geothermal, Microturbines

Applicable Sectors: Commercial, Industrial, Utility

Amount: 30% for solar, fuel cells and small wind; 10% for geothermal, microturbines and CHP

Maximum Incentive: $1,500 per 0.5 kW for fuel cells; $200 per kW for microturbines; $4,000 maximum credit for small wind. No maximum specified for other technologies.

Eligible System Size:

  • Small wind turbines: 100 kW or less
  • Fuel cells: 0.5 kW or greater
  • Microturbines: 2 MW or less
  • CHP: 50 MW or less
  • Equipment/Installation Requirements: Fuel cells, microturbines and CHP systems must meet specific energy-efficiency criteria
  • Authority 1: 26 USC § 48
  • Authority 2: H.R. 1424: Div. B (The Energy Improvement and Extension Act of 2008)

Date Enacted: 10/3/2008
Effective Date: 10/3/2008
Authority 3: IRS Form 3468

Summary:

  • The federal business energy tax credits available under 26 USC § 48 were expanded significantly by the Energy Improvement and Extension Act of 2008 (H.R. 1424), enacted in October 2008. The new law extended the duration — by eight years — of the existing credits for solar energy, fuel cells and microturbines; increased the credit amount for fuel cells; established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems; extended eligibility for the credits to utilities; and allowed taxpayers to take the credit against the alternative minimum tax (AMT), subject to certain limitations.

Credits are available for eligible systems placed into service on or before December 31, 2016:

  • Solar. The credit is equal to 30% of expenditures, with no maximum credit limit stated. Eligible solar energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. (Passive solar systems and solar pool-heating systems are not eligible.) Hybrid solar lighting systems are those that use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.
  • Fuel Cells. The credit is equal to 30% of expenditures, with no maximum credit limit stated. The credit for fuel cells is capped at $1,500 per 0.5 kilowatt (kW) of capacity. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have an electricity-only generation efficiency of 30% or higher. (Note that the credit for property placed into service on or before October 3, 2008, is capped at $500 per 0.5 kW.)
  • Small Wind Turbines. The credit is equal to 30% of expenditures, with a maximum credit of $4,000. Eligible small wind property includes wind turbines up to 100 kW in capacity. This credit applies to eligible property placed into service after October 3, 2008.
  • Geothermal Systems. The credit is equal to 10% of expenditures, with no maximum credit limit stated. Eligible geothermal energy property includes geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit. For electricity produced by geothermal power, equipment qualifies only up to, but not including, the electric transmission stage. For geothermal heat pumps, this credit applies to eligible property placed into service after October 3, 2008.
  • Microturbines. The credit is equal to 10% of expenditures, with no maximum credit limit stated (explicitly). The credit for microturbines is capped at $200 per kW of capacity. Eligible property includes microturbines up to two megawatts (MW) in capacity that have an electricity-only generation efficiency of 26% or higher.
  • Combined Heat and Power (CHP). The credit is equal to 10% of expenditures, with no maximum limit stated. Eligible CHP property generally includes systems up to 50 MW in capacity that exceed 60% energy efficiency, subject to certain limitations and reductions for large systems. The efficiency requirement does not apply to CHP systems that use biomass for at least 90% of the system’s energy source, but the credit may be reduced for less-efficient systems. This credit applies to eligible property placed into service after October 3, 2008.

In general, the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken.

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 credit is calculated must be reduced. (The formula is described in the tax credit instructions.) 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 business must reduce the basis for calculating the credit by the amount of any such incentives received. Businesses who receive other incentives are advised to consult with a tax professional regarding how to calculate this federal tax credit.

History
The federal Energy Policy Act of 2005 (EPAct 2005) expanded the existing federal business energy tax credit for solar and geothermal energy property to include fuel cells, microturbines and hybrid solar lighting systems installed on or after January 1, 2006, and raised the credit for solar to 30%. Prior to the provisions of EPAct 2005, a 10% credit was available to businesses that invested in or purchased solar or geothermal energy property.

  • Note that the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date. The credit for solar energy property reverts to 10% after December 31, 2016.

The Solar Investment Tax Credit FAQ

The Solar Investment Tax Credit

Frequently Asked Questions

On October 3, 2008, the President signed the Emergency Economic Stabilization Act of 2008 into law (P.L. 110-343). This legislation contains a number of tax incentives designed to encourage both individuals and businesses to make investments in solar energy, including 8-year extensions of the section 48 business solar investment tax credit (ITC) and the section 25D residential solar ITC.

The following is a brief summary of the provisions
directly and indirectly benefitting the solar industry, and answers to frequently asked questions about how the provisions operate.

Provisions Directly Benefitting the Solar Industry:
Business Solar Investment Tax Credit (IR Code §48). The bill extends the 30% ITC for solar energy property for eight years through December 31, 2016.

The bill allows the ITC to be used to offset both regular and alternative minimum tax (AMT) and waives the public utility exception of current law (i.e., permits utilities to directly invest in solar facilities and claim the ITC). The five-year accelerated depreciation allowance for solar property is permanent and unaffected by passage of the eight-year extension of the solar ITC. Residential Solar Investment Tax Credit (IR Code §25D).

The bill extends the 30% ITC for residential solar property for eight years through December 31, 2016. It also removes the cap on qualified solar electric property expenditures (currently $2,000), effective for property placed in service after December 31, 2008. The bill allows individual taxpayers to use the credit to offset AMT liability, and to carry unused credits forward to the next succeeding taxable year. The $2,000 monetary cap on solar water heating property was not lifted and remains in effect. New Clean Renewable Energy Bonds (“CREBs”). The bill authorizes $800 million of new clean renewable energy bonds to finance facilities that generate electricity from renewable resources, including: solar, wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, qualified hydropower,landfill gas, marine renewables and trash combustion facilities. This $800 million authorization will be allocated as follows: 1/3 will be used for qualifying projects of State/local/tribal governments; 1/3 for qualifying projects of public power providers; and 1/3 for qualifying projects of electric cooperatives. The bill also extends the termination date

for existing CREBs by one year. Thus, State and local governments, public power providers and electric cooperatives will be allowed to issue CREBs to

finance new renewable electric power facilities, including solar installations, through December 31, 2009.

Provisions Indirectly Benefitting the Solar Industry:

Extension of Energy-Efficient Buildings Deduction. Current law allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. The amount deductible is up to $1.80 per square foot of building floor area for property installed in commercial buildings as part of: (i) interior lighting systems, (ii) heating, cooling, ventilation, and hot water systems, or (iii) the building envelope. Expenditures must be certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to certain established standards. The bill extends the energy efficient commercial buildings deduction for five years, through December 31, 2013. Qualified Energy conservation Bonds. The bill creates a new category of tax credit bonds, “Qualified Energy Conservation Bonds” (QECBs) to finance State and local government initiatives designed to reduce greenhouse emissions. QECBs can be issued to finance capital expenditures incurred for: (1) reducing energy consumption by at least 20%; (2) implementing green community programs; and (3) rural development involving the production of electricity from
renewable resources. The bonds can also be used to finance research facilities and provide research grants for, among other things, technologies to reduce peak use of electricity. There is a national limitation of $800 million, allocated to States, municipalities and tribal governments. Research and Development Tax Credit. The bill would extend the research and development tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenditures for a taxable year exceed its base amount for that year. The R&D tax credit expired December 31, 2007. The provision would be extended retroactively to January 1, 2008 and through the end of 2009. In addition, the proposal would increase the alternative simplified credit from 12% to 14% for the 2009 tax year, and repeal the alternative incremental research credit for the 2009 tax year. The proposal is effective for amounts paid or incurred after December 31, 2007. Thus, research expenditures incurred by the solar energy industry would qualify for the credit.

Frequently Asked Questions:

When is the extension of the ITC effective for commercial property?

  • Answer: The extension of the ITC for commercial solar property is effective on the date of enactment, October 3, 2008. Since the existing credit was not scheduled to expire until December 31, 2008, this means that the credit has been seamlessly extended through 12/31/2016.

What is the effective date for the allowance of the sec. 48 commercial ITC against AMT liability?

  • Answer: The allowance of the sec. 48 ITC against AMT liability is effective for taxable years beginning after the date of enactment. For most taxpayers, this will mean that the credit against AMT is effective beginning on January 1, 2009. However, business taxpayers have flexibility in choosing their fiscal year for tax purposes. If a taxpayer uses a fiscal year that runs from November 1 – October 31st, it would mean that they can begin using the credit against AMT beginning November 1, 2008, rather than having to wait until January 1, 2009.

What is the effective date for waiver of the public utility exception?

  • Answer: This provision is effective for periods after February 12, 2008,in taxable years ending after such date.

When is the ITC effective for residential solar energy efficiency property

  • Answer: The extension of the ITC for residential solar energy efficiency property is effective on the date of enactment, October 3, 2008. Since the existing section 25D credit was not scheduled to expire until December 31, 2008, this means that the credit has been seamlessly extended through 12/31/2016.

What property qualifies for the section 25D residential ITC?

  • Answer: The credit applies to “qualified solar water heating property,” (defined as “property to heat water for use in a dwelling unit located in the U.S. and used as a residence by the taxpayer if at least half of the energy used by such property is derived from the sun), and to “qualified solar electric property” (defined as property which uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a residence by the taxpayer).

Does the elimination of the $2,000 cap on the section 25D residential credit apply to solar thermal property?

  • Answer: No. The elimination of the $2,000 cap applies only for qualified solar electric property expenditures.

What is the effective date of the elimination of the $2,000 cap for solar electric property expenditures?

  • Answer: The elimination of the $2,000 cap for solar electric property expenditures is effective for property placed in service after December 31,

State laws dictate when in-state property is placed-in-service. If I begin a residential installation now, can the lifted cap apply to this project?

  • Answer: That depends on whether the installation is completed after December 31, 2008. Section 25D(e)(8)(A) provides in general that an expenditure with respect to an item shall be treated as made when the original installation of the item is completed. In other words, the taxpayer may claim the credit as of the date that the installation of the residential solar electric property is completed and the property is placed into service. If an installation is begun in 2008, but the property is not placed into service until after December 31, 2008, the taxpayer may claim the credit for 30% of the expenditures made with regard to the installation.

Why was the $2,000 cap not lifted for residential solar water heating projects?

  • Answer: Although House and Senate staff agreed to lift the $2,000 cap for solar water heating projects, members of the Solar Thermal Division of SEIA voted overwhelming to maintain the cap.

What is the effective date for allowance of the solar ITC against the AMT?

  • Answer: The provision allowing individual taxpayers to use the solar ITC against AMT liability is effective for taxable years beginning after December 31, 2007. Thus, individual taxpayers who are required to pay alternative minimum tax liability (rather than regular tax liability) for the 2008 tax year may take a credit of up to $2,000 (the maximum credit amount for solar residential property placed in service during 2008) against the AMT liability. For the 2009 tax year, filers will be eligible to apply the full 30% ITC against the AMT liability.

Were the bonus depreciation provisions enacted as part of the Economic Stimulus Package earlier this year that are currently set to expire on 12/31/08 extended as part of the Emergency Economic Stabilization Act?

  • Answer: No, the bonus depreciation rules were not extended. Bonus depreciation should not be confused with the five-year accelerated depreciation of solar property under Section 48.

Contact:
Public Information – IRS
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Phone: (800) 829-1040
Web site: http://www.irs.gov

 
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