Hawai’i issued temporary regulations on Friday that refined the way it will calculate the cap on its tax credit for solar systems placed in service after December 31, 2012.
The new rules apply the cap to blocks within a project site. Each 5kW block of a residential project and 1mW block of a commercial project on a parcel will be treated as a separate system with its own cap.
Previous guidance applied the cap to each integrated unit that had a separate connection to the electrical system at the site. A separate connection installed for tax purposes (i.e. not for legitimate design motivations) was disregarded.
Project owners and their investors found it difficult to apply this construct with any certainty. This led to a flood of questions to the tax department.
In some cases, investors in and purchasers of solar projects conditioned funding on receipt of a ruling from the tax department. However, the department put a hold on new rulings after a short time.
Efforts to amend the statute legislatively failed in 2012. A new legislative session begins in January 2013. The tax department issued the temporary regulations as a stopgap due to the delay in legislative action.
The temporary regulations do not provide transitional rules for project owners that relied on the previous guidance in designing their projects.
Nevertheless, the regulations may be viewed as sufficient since legislative consideration could open the door to reduction or elimination of this incentive, which has been criticized by some as too rich.
The uncapped credit is 35% of a solar system’s cost. A project owner can elect to receive the credit in cash to the extent the credit exceeds the owner’s tax bill. However, the credit is reduced to 24.5%.
The residential cap is $5,000 per block; the commercial cap is $500,000 per block.
The credit is taxable for Hawai’i tax purposes to the extent it is claimed in cash.
Some investors have questioned how partners in a partnership that owns a solar project should share the credit because co-owners have to share the credit in proportion to their capital contributions.
However, a separate rule for partnerships points to a separate credit’s rules where the credit is shared according to each partner’s share of profits.