SEIA Guide to Federal Tax Incentives for Solar Energy - Solar Power ...

prevented the taxpayer from claiming the credit had it happened at the start, then the"unvested" part of the credit will be recaptured (paid back to the IRS). For example, theunvested credit will be recaptured if the taxpayer sells the solar equipment or leases itfor use by a government agency.A taxpayer should take the potential for recapture into account when consideringwhether to sell solar equipment on which tax credits have been claimed before therecapture period has expired.The unvested portion of the credit will have to be reported as income in the year therecapture event occurs. The taxpayer can add back to his tax depreciation basis half therecapture income reported in the recapture year. The amount added back to the taxdepreciation basis can be deducted over time as additional depreciation if the taxpayercontinues to own the project. If the recapture event is a sale of the project, then thetaxpayer will have less gain to report from the sale because of the upward taxdepreciation basis adjustment. He will also have a potential mismatch in tax rates.Recapture income is ordinary income. Gain from a sale in many cases will be capitalgain. The combination of credit recapture and the upward basis adjustment have theeffect of converting income from capital gain into ordinary income.8.2 Recapture Rules for Nonrecourse Financed Projects(Please note that these considerations apply only to projects not covered under theexemptions under section 4.4.)Taxpayers covered by the at-risk rules should be careful not to increase the amount ofnonrecourse debt secured by the project in a later year as that could lead to recaptureof a commercial solar tax credit claimed earlier. Also, credit will be recaptured to theextent that a principal repayments fall short, at the end of any tax year, of the principalthat would have had to be repaid by then under a level-payment loan. "Level payment"for this purpose means straight-line amortization of debt service over the term of theloan or, if shorter, the "class life" of the equipment. Most solar equipment has a classlife of 12 years.8.3 Recapture Rules for PartnershipsPartners face an added risk of recapture of a commercial solar tax credit.For example, let us restate the partnership scenario from section 6.2. There are twopartners -- A and B -- who agree to allocate 99% of taxable income to B for the firstthree years in order to realize the majority of the energy credits for B, and move thepartnership to a 50-50 basis from year four onward. If the partnership continues to havetax losses in year four, the IRS may argue on audit that the 99-1 sharing ratio fortaxable income is a sham.SEIA Guide to Federal Tax Incentives for Solar Energy Version 1.2- 16 -