Are Solar Energy Investment Tax Credits Losing Power?
Solar energy – that perpetual, inexhaustible power source – has been harnessed and used to provide heating and cooling in our homes, offices and schools for decades; and, as an alternative to fossil fuels, it has become a potent symbol of conservation. Corralling and using solar energy commercially progressed in fits and starts but gathered real momentum when the federal tax laws recognized that investments in solar energy were of national importance and worthy of tax credit (investment tax credit or ITC) consideration against the costs of equipment purchase, installation and maintenance.
Just a quick review of the enabling tax legislation reveals the following: The Energy Policy Act of 2005 (P.L. 109-58) originally established the ITC for solar energy systems placed in service between January 1, 2006 and December 31, 2007. With a series of extensions since, most recently a spending bill passed by Congress in December of 2015, the ITC is currently available to homeowners through 2021.
All good, right? Well, maybe not - there are clouds looming on the horizon as the ITC benefits begin to phase out for individuals in 2020!
Let’s take a look at the tax legislation picture:
For the current tax year of 2019, in the case of an individual, a 30% tax credit of the qualified solar energy property expenditures made by the taxpayer is allowed against personal income taxes. Importantly, under IRS Notice 2018-59 there are two tests – either of which may be used by the taxpayer - to prove progress towards the installation of a qualified solar facility, and thus qualify for the ITC.
The physical work test (begin physical work of a significant nature); or the
Five percent safe harbor test (paying five percent or more of the total cost in the year that construction begins).
Both of these methods require that a taxpayer make continuous progress toward completion of the project once construction has begun. This ITC applies to both residential energy efficient property and commercial energy efficient property pursuant to Internal Revenue Code Sections 25D and 48, respectively.
Now the 30% tax credits are being reduced, and for 2020 and 2021, homeowners installing new residential solar energy systems can claim as a tax credit 26% and 22%, respectively, of the cost of the energy systems from their personal income tax liability. These same percentages apply for business or commercial energy systems. Then, for 2022 and subsequent years, businesses can only deduct 10% as an ITC of new commercial energy systems. Worse, there is no federal ITC for new residential energy systems post December 31, 2021, unless Congress once again extends this valuable program.
This is an example of a program that is working, one that enjoys broad bipartisan support and is worthy of extension. The question is whether, in the present toxic legislative environment, enough common ground can be found – and enough Congressional champions come forth. Let’s hope this is the case. The energy ITC is an important federal policy action designed to enhance the growth of solar energy and incentivize clean sustainable energy throughout the United States - so why put the brakes on it now?
It is probably worthwhile to take a brief look at the hurdles taxpayers must overcome to qualify for the solar energy ITC.
In order to take the solar ITC against a taxpayer’s income tax liability, the property must be certified by the nonprofit Solar Rating Certification Corporation; or a comparable entity endorsed by the federal government or the state in which the property was installed.
The same applies for businesses that install, finance and/or develop various solar energy projects.
Furthermore, it is important to keep in mind that the ITC is a dollar-for-dollar reduction of the homeowner’s or business’s income tax liability that would otherwise be paid to the government; and that if the credit is allowed for any expenditure with respect to the property, the increase in the basis of such property, which would result from such expenditure, is reduced by the amount of the ITC allowed. The tax credit is allowed to homeowners who purchase solar energy systems that are installed in and attached to their personal residences. Qualified energy systems entitled for the ITC can be expenditures on solar water heating property, solar electric property, fuel cell property, small wind energy property and geothermal heat pump property.
From a filing point of view, individual and business taxpayers claim the solar energy ITC on Part II of Federal Form 5695 and Part III of Federal Form 3468, respectively. If the ITC is not fully utilized in the year the expenditures are incurred, the excess tax credit can be carried to the succeeding taxable year to offset future years’ tax liability for as long as the investment tax credit is in effect.
Commercial and residential construction groups are aware of the ITC reductions and are speaking to their representatives, but this is too important an issue for individual home owning taxpayers to ignore.
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