The Solar Investment Tax Credit (“ITC”) is part of the energy credits provided for in Section 48 of the Internal Revenue Code (the “Code”). Implemented by Congress in 2006, the ITC was designed to encourage the use of renewable sources of energy, including solar energy. It is one of the most significant federal policies to support the development of solar energy, and catapulted the US solar energy industry in 2006-2007. Since its implementation, there has been an increase of over 4,000% in photovoltaic (solar) installations in the US. The Code provides separate ITC’s for residential and commercial property.
The ITC reduces the tax liability for individuals or businesses that purchase “qualifying solar energy technologies”. Qualifying technologies include equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat other than for heating swimming pools. Also qualifying is equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.
If qualifying solar energy technology is placed into service before December 31, 2016, the ITC provides a tax credit equal to 30% of the total cost of the solar energy system. It is a dollar-for-dollar reduction in federal income taxes for businesses and individual taxpayers. The ITC is limited, however, by the amount of the taxpayer’s net income tax payable for the year the system is placed into service. If a taxpayer does not have sufficient income tax for the initial year, the ITC can be carried back to the previous tax year, or carried forward for 20 years – a significant advantage for taxpayers.
To qualify for the ITC, the photovoltaic system must be placed into service by December 31, 2016, and must be new equipment. The credit is only allowable for taxpayers maintaining property inside the US that is subject to US taxes. Examples of eligible property for the ITC are all solar panels, solar curtains walls, and all material and installation costs; set up transformers, circuit breakers, energy storage devices, and surge arrestors; and power and transfer equipment, such as collectors, storage tanks, rockbeds, thermostats, and heat exchangers.
The ITC is subject to recapture rules that could diminish or potentially eliminate the tax benefit altogether. Under the recapture rules, a business must retain ownership of the system until the 6th year following installation of the solar equipment, or pay back a portion of the tax credit to the IRS. Taxpayers claim the full ITC in the year the photovoltaic system is placed in service, but the credit actually “vests” at a rate of 20% per year over five years. Any “unvested” portion is subject to recapture and repaid to the IRS. As an example, if a business sells the system one year after installation, only 20% of the credit vests, and the business would have to repay 80% of the total credit claimed in year 1 to the IRS.
Although the ITC provides a 20–year carry–forward of the credit, some businesses still may not generate sufficient income tax to utilize the energy credit. These businesses can monetize the credits by selling them to tax equity investors who can use the credits, or utilize tax equity structures to share credits. The three most utilized tax equity structures are sale–leasebacks, partnership flips, and inverted leases. All three structures allow the business to monetize the ITC, but have detailed requirements and structural provisions that are beyond the scope of this blog.
The State of Florida also provides solar energy tax incentives for residential and commercial use. The “Solar Energy Technologies Sales Tax Exemption” provides a 100% sales tax exemption for qualifying solar equipment purchased before June 30, 2016. The “Renewable Energy Production Credit”, available only to commercial taxpayers, is a corporate income tax credit equal to $.01/kWh of electricity produced and sold by the taxpayer through June 30, 2016 (there is also a 5–year carry–forward for this credit).
The Federal ITC is currently set to expire December 31, 2016, although efforts are under way in Congress to extend it another 5 years. The Florida solar tax credits expire June 30, 2016. As with all tax credits there is no certainty the solar credits will be extended. If businesses have ever contemplated use of solar energy, now is the time to act.