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Solar Energy Can Lower Your Taxes!

We’ve all heard of the concept “going green” to save on energy costs. This catchphrase has raised an important issue and has changed our lives in one way or another. Most of us understand the environmental impact, or lack thereof, of going green but there are several other advantages that make going green even more enticing. One of those advantages is the generation of tax credits and generous depreciation rules.

What is solar energy?

Generally speaking, solar energy is energy created by converting heat generated from the sun into usable power. The four areas where solar energy is typically used are lighting, concentrating solar power, heating and cooling systems, and photovoltaics. All of these systems revolve around using fewer carbon-based energy resources. 

How will my business benefit?

One of the biggest advantages of using solar energy is a reduction in utility costs. Since much of the energy required and used by businesses can be solar-generated, utility costs could be greatly diminished by using solar energy. This change would have an immediate impact on cash flow. However, these savings must be offset by the cost of generating solar energy in an area as far north as Chicago.

There are a number of tax incentives that can offset the cost of generating solar energy. Taxpayers saw an increased focus on tax-saving incentives for energy-efficient property in the Emergency Economic Stabilization Act of 2008 and again in the American Recovery and Reinvestment Act of 2009. Both of these acts either increased or extended the current tax incentives, giving taxpayers more benefits for use of energy-efficient property. The tax savings for installing solar energy property comes in the form of an investment tax credit for business and individual residential use.

There are some specific criteria that must be met for property to qualify as energy-efficient. Solar water-heating systems must be certified by the Solar Rating and Certification Corporation (or a comparable entity endorsed by the state in which the property is located). Any solar water-heating system expense associated with heating a swimming pool or hot tub does not qualify. Photovoltaic systems must provide electricity and meet electric and fire codes. Certain solar lighting systems used in businesses qualify as energy-efficient property.

The tax credit related to solar energy property is 30% of the system cost to the taxpayer. Systems installed after December 31, 2008 are not subject to any cost limitations. The credit has been extended through December 31, 2016. This credit will offset both regular and alternative minimum taxes (AMT).

Additionally, there are certain grants issued by the U.S. Department of Energy for purchasing energy-efficient property. However, taxpayers are only eligible to receive either the grant or a credit (not both). The grants are generally 30% of the system cost.

Regardless of whether the taxpayer receives a grant or uses the investment tax credit, the basis of the property is reduced by 50% of the benefit received. The remaining basis of the property is depreciable over five years. Additionally, business property is eligible for both Section 179 and/or bonus depreciation under Section 168(k). This allows the taxpayer to potentially write off the entire cost of the property in the year of acquisition. There are many limiting factors to these sections, so please contact us for guidance.

The tax credit is currently nonrefundable. This means the credit can reduce your tax liability to zero, but not below. Any additional credit can be carried forward to offset future tax liabilities. There are many solar and wind industry officials pushing Capitol Hill to pass legislation that would make the credit refundable (allowing taxpayers to receive a refund for the amount of credit in excess of any tax liability). President Obama has made a dubious plan of doubling renewable energy production in three years, but there is no current legislation that calls for additional changes.

There are also several state benefits for installing solar energy property. State incentives range from credits to rebates and vary from state to state. Illinois, through the Department of Commerce and Economic Opportunity, offers up to a 30% rebate for installing solar energy property for costs up to $10,000. For more information visit the Illinois Department of Commerce and Economic Opportunity. If the taxpayer receives a rebate from a state, the basis of the property is reduced by the rebate before calculating any federal grant, credit or depreciation.

Example

Cost of solar water heater: $10,000
Illinois state rebate: $3,000 ($10,000 x 30%)
Adjusted basis in property: $7,000 ($10,000 - $3,000)
Federal investment credit: $2,100 ($7,000 x 30%)
Basis for depreciation: $5,950 [$7,000 - ($2,100 x 50%)]

For further information, please contact Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.