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How to Calculate the 30% Federal Solar Investment Tax Credit (ITC)

MonopTaxAnnCleaver2000

Photo:Flickr/ AnnCleaver 2000

The end of the year brings the thought of the Spring yet to come. And with that Spring comes the taxes yet to pay.

Me thinks this is why we’ve been getting a lot of emails about the 30% Federal Investment Tax Credit (ITC) for solar. Some claim that one should calculate the 30% tax credit before any state or utility rebates; i.e., the gross installed cost. Others claim one should calculate the 30% after deducting state rebates; i.e., the net cost paid to your installer, who typically collects the rebate on your behalf. Which is right?

Before I answer that excellent question, please read the following 3 important caveats:

1) We are solar geeks, not tax geeks. Please, Lord, we pray that ye will consult thy personal tax geek before following our unprofessional tax guidance. Amen.

2) As of 12-15-09, the IRS and its tax lackeys have yet to write clear guidance on this issue. Instead, they have left it up to interpretation, thus far. This may be their idea of tax accounting sh$ts & giggles. We are not amused (but please don’t audit us.) Nevertheless, as noted below, we have consulted an authority on the subject.

3) Please Re-Read #1 and #2. You have been warned. Cross your fingers and read on.

So, which is right? The short answer is that both are right, but one method applies to residential solar (homes) and the other applies to commercial solar (businesses) –but with a catch.

For Residents:

  • Calculate your 30% Federal tax credit after any state or utility rebates. That’s how we do it here on SolarPowerRocks.com. In other words:
  • If the cost of your solar power system was $35,000 before any rebate, and you receive $15,000 in state rebate money, then we suggest you calculate the 30% off $20,000.
  • Thus, your tax credit would be $6,000, bringing your net system cost to $14,000.
  • Solar Fred Important Note #1: This $6,000 tax credit is not refundable. So, if you owe $3,000 in taxes for 2010 to the IRS, you’ll pay no taxes on April 15th, but Uncle Sam won’t be sending you a $3,000 refund check. Instead, you must apply this to next year’s taxes….or the next.
  • Solar Fred Important Note #2: If you get your solar system through a solar lease or a solar PPA, you DO NOT get the 30% tax credit or any REC payments, if applicable. The solar leasing or solar PPA company gets it. Too much to go into now, but this is why buying is better in the long run. That reminds me to shamelessly plug the fact that you can get a free solar quote now from one of our local partner installers to see if solar makes financial sense for you…or not.  Moving on.

For Commercial Solar Installations:

  • Feel free to calculate your 30% Federal ITC tax credit before any state or utility rebates. But there’s a catch.
  • The catch is that Uncle Sam sees you as a profit making venture. Consequently, if you get a rebate of $15,000 rebate from the utility, that’s seen as income/revenue, and therefore, they’re going to tax that $15,000.
  • So, in the same example, you can subtract $15,000 off your $35,000 gross cost, and also apply another $10,500 (30% x $35,000) to your quarterly tax bill, making your pre-taxed net cost $9,500.
  • However, that $15,000 will be taxed as income, and thus….could take away any gain over the residential net benefit. Bummer.
  • Solar Fred Important Note (again): If you finance your solar system through a solar lease or a solar PPA, you DO NOT get the 30% tax credit or any REC payments, if applicable. As with residential, the solar leasing or solar PPA company gets it. Once, again too much to go into now, but this is another opportunity to shamelessly plug the fact that you can get a free solar quote now from one of our local partner installers to see if solar makes financial sense for your business…or not.
  • Solar Fred Important Note: Solar companies and developers who are creating solar products or large industrial installations for can apply for 30% “grant.” Yes, cash. This is part of the stimulus package, but it doesn’t apply to non-solar businesses. Bummer again.
  • Solar Fred Important Note #2: If you sell your commercial property within 5 years of installing solar, there may be some tax consequences. Please see the comments section of this post for more clarification.

And what is our source for the above? We have divined this tax guidance from the Solar Energy Industry Association (SEIA), mere mortals, but ones with connections to tax gods. Please see the SEIA FAQ and the corresponding explanation from our other mortal friends at the Database of State Incentives for Renewables and Efficiency (aka DSIRE.)

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15 thoughts on “How to Calculate the 30% Federal Solar Investment Tax Credit (ITC)

  1. Mike says:

    We are getting our roof replaced and one of the potential roofers tells me that if we add a solar vent, the entire project cost (including all the roof work) is used in the calculate the 30% tax credit. Is this correct?

  2. Don P says:

    Bob,
    RECs (Renewable Energy Credits) are not the same thing as rebates. The rebates in question are the ones that a person gets from their local and/or state government and/or their electric utility company to help decrease the initial cost of installing a system and as an incentive to install a system.

    An SREC (Solar Renewable Energy Credit, or Solar REC) is a credit that represents 1MWH of electricity created from a PV system. Rebates are to decrease the initial cost of installation and RECs are for production of electricity.

    Go to the home page of this website, click on a state and look for the section on performance payments or SRECs. Who actually owns the RECs will depend on your state laws and possibly your power company. In Florida (where I live) the RECs, by law, are the property of the system owner. From researching RECs when discussing it with a coworker from New York, I can tell you that if you have net metering with Long Island Power Authority, the RECs become the property of the power company. In some states the RECs, if you own them, can be sold for a significant amount. In Florida, however, trying to find a way to sell them is difficult and the amount you can get for them is minimal. I just wish I could sell mine in New Jersey… at the going rate of around $693 per SREC. The most I’ve heard about in Florida is about $30 per SREC.

    Back on the subject of taxes, I’m not a tax expert or anything, but it would seem to me that “IF” a person has the choice of how to calculate the rebate, the best way would depend on your tax bracket. If you paid $30k for a system and got a $15k rebate, taking the credit after subtracting the rebate would give you a tax credit of $4500 making the system cost $10,500. ($30k-$15K=$15k, 70% of $15k= $10,500) “IF” you can get the credit on the entire initial cost, however, you would get a credit of $9000. You would then have to pay taxes on the $15K rebate. The only way that this wouldn’t be better would be if you were in the 30% percent tax bracket or higher. If you were in a 20% tax bracket, for example, you would pay $3000 in tax on that $15k and end up with $12k of the rebate (80% of the $15k) after subtracting the tax, making the system cost $9k and leaving you $1500 better off overall. That’s assuming that you can legally do that. (70% of $30k=$21k, 80% of $15k=12k, $21k-12K=$9K)

  3. bob hope says:

    The information is not correct according to a private letter ruling form the IRS regarding this matter. The cost basis for the rebate is calculate before any REC payments (sometimes called rebates) from utilities. The unfortunate side effect of this ruling is that the rebate is now income and is taxed accordingly. Read the Private Letter Ruling 201035003 at http://www.irs.gov/pub/irs-wd/1035003.pdf for more details.

  4. andy says:

    im looking into building and installing a ppm (electro magnetic) generator system can i get the same grants as a solar system?

  5. Frank says:

    I just put on a new roof and a 9.66kw solar array. It was a roofing/solar company that installed it. They informed me I needed a new roof to hold the solar array. Can I get 30% back off the roof and the solar, as it was an additional cost?

  6. stan says:

    For condo associations I understand that they don’t get the State and Federal tax rebates. Bummer

  7. Dan says:

    I am trying to squeeze in a federal grant for a solar system beginning construction before 12/31/10. At this point, I was ready to order and pay for the inverters. My accountant is unsure whether the inverters constitute “solar energy property” for purposes of the grant. Seems to me that it is a no brainer but he’s got me worried.

  8. susco says:

    if you add panels to your system 2 years later can you take the 30% for the add. panels?

  9. micheal rivera says:

    Great, Great information, I am seriouly trying to install a micro invertor system in NYS and your site is very helpful. Keep it up and thanks.
    Mike

  10. Dave, short answer is yes, but not all at once. From what we understand, the balance will be rolled over into next year, so you’ll have another $1,000 to use as a credit for next year.

    Hope that helps,

    Solar Fred

  11. dave shaffer says:

    Installed a 5kw system and am eligible for a $9600.00 30% rebate but have only paid $8600.00 in Fed taxes. Will I receive the full $9600.00 rebate after filing 2010 taxes?

  12. Dan Hahn says:

    Arborlast,

    That $500 per .5kW cap is for fuel cells, not home solar energy. The solar energy credit is 30% of costs. Hope you filed for all the money due to you!

    - Dan

  13. Arbolast says:

    Just recently had a 9.2kW system installed on my home at a cost of about $50,000 & was looking forward to the 30% solar tax incentive. BUT – my tax advisor pointed me to EnergyStar.gov which states the tax credit is “30% of the cost, up to $500 per .5kW of power capacity”. So although I thought I’ve be getting a $15,000 tax credit (30%), I’m now only going to get $9,000 ($500 per .5 kW). Not that $9,000 is bad – just not what I’ve seen published and promoted!

  14. Wayne says:

    Ok, I do’t mind being called a Tax Geek (actually I’m sorta proud of it!) Your advice to solar companies is essentially correct, except, the rebates and credits aren’t per se taxable, they are applied to reduce the “cost of goods sold” as accountants call it. The net effect is the same, your costs are reduced, profits increase, the profits are the taxable part…but the rebate itself isn’t actually taxable.
    …and like you said it isn’t a refundable credit so where you put the rebate is important to getting money back if you are due.

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