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

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January 27, 2006To the Solar Energy Industry and Users:The passage of the solar tax credits in the Energy Policy Act of 2005, which created thefirst residential tax credit in 20 years and expanded the commercial tax credit, was anhistoric moment for solar energy development in the United States. Already, the taxcredits are encouraging states and private industry to invest in solar power. To ensurethat the tax credits are fully utilized by the industry to the letter of the law, SEIAcontracted with Chadbourne & Parke, LLP to create this tax manual. This guide, paidfor by the members of Solar Energy Industries Association, will enable companies andindividuals to utilize the federal incentives to their full and legal benefit in conjunctionwith state and utilities incentives, thus avoiding potential tax errors or abuses. SEIAencourages you to review this document fully and to consult a tax attorney for specificproject questions.Under the Energy Policy Act of 2005, consumers can claim the 30 percent tax credit foronly two years – 2006 and 2007. Those in the solar industry know that having a twoyearwindow for the tax credit is not long enough to substantially grow manufacturingand installations. A long-term credit is needed for realistic business planning andgrowth. Furthermore, as the U.S. becomes mired in an intractable energy crisis that isalready having a significant economic drain on the country, Congress needs to developlong-term energy solutions that deliver immediate results. And solar power, whichreduces peak energy demand and achieve energy savings for consumers, must be partof the solution.Accordingly, SEIA will be working this year with Congress to extend the tax credits forthe next decade. But we cannot do this alone, so we call on all companies in theindustry to join us in this effort, and to become SEIA members.Sincerely,Rhone ReschPresidentChris O’BrienChairmanLes NelsonSolar Thermal Division ChairJeff WolfePhotovoltaics Division ChairFred MorseConcentrating Solar Power Division Chair
EXECUTIVE SUMMARYIn the Energy Policy Act of 2005, Congress created federal income tax credits for solarenergy projects. There are separate incentives for solar equipment depending onwhether it will be put to use on a commercial or residential property. For businesses,when combined with incentives for accelerated depreciation of solar equipment, thesecredits help reduce the capital cost of new solar energy equipment by up to 60%. Forhomeowners, these credits provide the first federal incentives for solar power since1985.The SEIA Guide to Federal Tax Credits for Solar Energy provides comprehensiveinformation as to how the incentives for both commercial and residential applicationsmay be claimed. Key considerations in calculating the value of federal incentives for asolar project include:· What types of solar equipment constitute “eligible property” for each of theincentives;· Amount of the incentives;· Conditions for a system to meet the definition of “put in service” (for example,the taxpayer must have taken legal title and control of the equipment);· The value of the “tax credit basis”;· Project timing issues arising from the tax credit window;· Ownership structure of the project; and· The effect of rebates, state tax credits, and other subsidies on the federal taxcredits.Since there exists a wide variety of state incentives and policies that may impact thevalue of the tax credit, this manual categorizes different types of incentives anddiscusses their impact on the tax credit basis. For example, the IRS has ruled thatsubsidized loans (known as “tax-exempt financing” or "subsidized energy financing")and at-risk limitations on financing as a result of non-recourse type lending do reducethe tax basis for determining the value of the tax credit. Accordingly, this manualdemonstrates how such rules apply to solar projects and how to calculate the reductionof the tax basis for the federal credit. Examples are also given as to how to calculateturnkey costs on projects eligible for both state and federal income tax credits.The manual is organized in two sections. The first section covers general projectissues, as well as issues that are unique to the commercial credit. The second sectioncovers issues specific to the residential credit. However, it is recommended thatreaders who intend only to take the residential credit still read through the first sectionon the commercial credit.At the end of each section, the guide provides workbook examples for calculating thevalue of the residential and commercial tax credits under different project conditions.
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