Solar Energy Systems: Incentives Are Better Than Ever

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The 30% federal tax credit available to homeowners and businesses to install solar energy systems was recently expanded and extended. A dollar-amount cap was removed from the credit for residential solar water heating systems, and the availability of the credit for all systems was extended through the end of 2016. Many state and local governments also offer incentives. The cost of solar components has been dropping, and electricity prices will likely go up. Taken together, these developments make installing a solar electric or solar water heating system much more appealing than in the past.

RESIDENTIAL SYSTEMS

The residential energy efficient property (REEP) credit in IRC [section] 25D applies to expenditures for solar water heating and solar electric systems installed in a residence in the U.S. that is used by the taxpayer (not necessarily as a principal residence). Taxpayers who own condominiums or are shareholders in a housing cooperative are eligible for their proportionate share of credits resulting from solar energy installations by the condominium management association or cooperative. For a solar water heating system to qualify, at least half the energy used to heat water in the residence must come from the system. Before amendment by the American Recovery and Reinvestment Act of 2009 (PL 111-5), the solar water heating property credit was limited to $2,000 a year.

The PEEP credit is available in the year in which the use of the solar energy system begins. The credit is nonrefundable, but any unused portion can be carried forward. For tax years beginning after 2009 (those for which the limitations of section 26(a)(2) don't apply), it can be applied against the alternative minimum tax. Allowable expenditures for purposes of the credit include the costs of the system, piping and wiring to connect the system to the home, plus labor related to preparation, assembly and installation. Expenditures for solar energy systems increase the basis of the taxpayer's property, but the property's basis must be decreased by the amount of the credit allowed. Solar energy systems used to heat swimming pools, hot tubs or any other storage medium also used for any purpose other than heat storage do not qualify for the credit. For solar water heating systems, the property must be certified for performance by the nonprofit Solar Rating and Certification Corp. or a comparable entity endorsed by the government of the state in which such property is installed. There is no required certification for solar electric systems.

BUSINESS SYSTEMS

Nonresidential installations can qualify for a business energy credit under IRC [section] 48 as part of the investment tax credit. Qualifying property includes that which uses solar energy to generate electricity, to heat or cool a structure, or to illuminate the inside of a structure using fiber-optic distributed sunlight. Property used to heat a swimming pool does not qualify,

Businesses that take advantage of the solar energy credit under section 48 cannot also claim the production tax credit under section 45 for the same facility, To elect the section 48 energy credit in lieu of the production tax credit, taxpayers must file Form 3468, Investment Credit, and attach additional information described in Notice 2009-52.

Solar energy property described in section 48 is five-year property for purposes of modified accelerated cost recovery system (MACRS) depreciation. When the business energy credit is taken, the property's basis is reduced by only one-half the amount of the credit.

Because of the difficult economic times, Congress was concerned that a nonrefundable credit might not create enough incentive for businesses to install alternative energy systems in the near term. Therefore, Congress in the ARRA authorized grants in lieu of the business energy credit for energy property placed in service in 2009 and 2010, or placed in service after 2010 if construction begins on the project before 2011 and is completed by Dec. …