Federal Incentives

Energy Investment Tax Credits

Overview:

The 30% Federal Tax Credit allows businesses to offset their income taxes when they purchase a solar power system. The IRS tax code also allows for the tax credit to provide AMT relief.

The federal business energy investment tax credit available under 26 USC § 48 was expanded significantly by the Energy Improvement and Extension Act of 2008 (H.R. 1424), enacted in October 2008.

This law extended the duration — by eight years — of the existing credits for solar energy, and allowed taxpayers to take the credit against the alternative minimum tax (AMT), subject to certain limitations. The credit was further expanded by The American Recovery and Reinvestment Act of 2009, enacted in February 2009.

The federal Business Energy Investment Tax Credit (ITC) has been amended a number of times, most recently in December 2015. The table below shows the value of the investment tax credit for each technology by year. The expiration date for solar technologies and wind is based on when construction begins. For all other technologies, the expiration date is based on when the system is placed in service (fully installed and being used for its intended purpose).

Technology 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Future Years
PV, Solar Water Heating, Solar Space Heating/Cooling, Solar Process Heat 30% 30% 30% 30% 26% 22% 10% 10%
Hybrid Solar Lighting, Fuel Cells, Small Wind 30% N/A N/A N/A N/A N/A N/A N/A
Geothermal Heat Pumps, Microtubines, Combine Heat and Power Systems 10% N/A N/A N/A N/A N/A N/A N/A
Geothermal Electric 10% 10% 10% 10% 10% 10% 10% 10%
Large Wind 30% 24% 18% 12% N/A N/A N/A N/A

Carryback / Carryforward Provisions

A commercial solar tax credit that a taxpayer cannot use can be carried back one year. If there is still an unused credit, then the credit can be carried forward 20 years.

Background / Authority

  • The federal Energy Policy Act of 2005 (H.R. 6) expanded the federal business energy tax credit for solar installed in 2006 and 2007. These provisions of the tax credit were later extended through December 31, 2008, by Section 207 of the Tax Relief and Health Care Act of 2006 (H.R. 6111).
  • The Energy Improvement and Extension Act of 2008 (HR 1424) greatly extended the duration and terms of the tax credit available to business owners.
  • Business energy credits are claimed by attaching Form 3468 to one’s tax return.
  • http://www.irs.gov/pub/irs-pdf/f3468.pdf
  • General Business credits are claimed by attached Form 3800.
  • http://www.irs.gov/pub/irs-pdf/f3800.pdf
  • Authority: Section 48(a)(3) (Investment Credit: Energy Credit) of the IRS tax code.
  • Title 26: http://www.dsireusa.org/documents/Incentives/US02F.htm

Accelerated Depreciation

  • For solar property placed in service after 1986, the current Modified Accelerated Cost-Recovery System (MACRS) property class is five years.
  • For more information, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form 4562. The IRS web site provides a search mechanism for forms and publications. Enter the relevant form, publication name or number, and click “GO” to receive the requested form or publication.

The depreciation schedule is:
5-Year Property Half-Year Convention

Year Depreciation Rate for Recovery Period
1 2 3 4 5 6
20.00% 32.00% 19.20% 11.52% 11.52% 5.76%

Depreciation Basis Calculation:
For the purpose of calculating depreciation on a commercial solar system, the “tax depreciation basis” is a distinct value – separate from the tax credit basis. The tax depreciation basis that the taxpayer claims for the solar equipment must be reduced by 50% of the tax credit.

Formula:
Tax Depreciation Basis = System cost – (50% x 30% x System Cost) Or Tax Depreciation Basis = 85% x System cost

For more information, see: