Solar Energy Qualifies for 30% Federal Tax Credit and Other Incentives in 2011
Share this post
Make it a Sunny New Year!
There is bright news for both homeowners and businesses who are ready to make 2011 the year they finally go solar – several federal credits remain in place or have been extended.
- The uncapped 30% federal tax credit on residential solar electric (PV) and solar hot water (SHW) systems remains in effect through 2016.
- In 2013 businesses can get a 30% federal investment tax credit in addition to state rebates (up to $4,000 in Maine, up to $50,000 in New Hampshire)
- For Maine homeowners, up to $2,000 is available as a state rebate for SHW and PV though funds are running out.
- For New Hampshire homeowners, up to $3,750 is available for PV and $1,500 on average for SHW
- New Hampshire residents in New Hampshire Electric Co-op (NHEC) territory are eligible for an additional PV rebate up to $2,000
- Through 2013 bonus depreciation has been extended, allowing businesses to depreciate system costs up to 50% in year one for systems installed in 2013 (with the rest coming over the next five years)
Read on for more specifics about each incentive.
Residential 30% Federal Tax Credit
The 30% federal tax credit is called the “Residential Renewable Energy Tax Credit” and was established by the federal Energy Policy Act of 2005.
This credit was initially capped at $2,000 for solar energy systems, but was expanded by The American Recovery and Reinvestment Act of 2009 to be an uncapped rebate for 30% of the cost of a renewable energy system (both photovoltaic and solar thermal are eligible, along with small wind and geothermal heat pumps).
The 30% includes all cost of labor as well as equipment costs for the renewable energy system. The credit can also be carried forward to future tax years if you cannot take the full credit in the year the system was installed.
- A homeowner claims the 30% credit on IRS 5695, Residential Energy Credits (PDF)
- The Solar Energy Industries Association has a great solar federal tax incentive FAQ
- Also see DSIRE – Residential Renewable Energy Tax Credit
Business Energy Investment Tax Credit (ITC)
Businesses as well as homeowners can benefit from a 30% tax credit on renewable energy systems, called the energy investment tax credit.
This program 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, fuel cells and microturbines; increased the credit amount for fuel cells; established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems; allowed utilities to use the credits; 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.
MACRS + Bonus Depreciation
Under federal tax code, renewable energy systems qualify for a 5-year Modified Accelerated Cost-Recovery System (MACRS) depreciation schedule.
The exact benefit of this depreciation is complicated and varies depending on your businesses’ tax rate, but typically it adds up to an additional 25% of a solar energy project’s cost being offset by reduced tax payments.
To further sweeten this incentive, in 2011 bonus depreciation has been extended, letting a business enjoy most of the benefit in year one, rather than waiting for the entire five year schedule.
DSIRE sums it up nicely:
The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively for the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. Bonus depreciation was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297).
In December 2010 the provision for bonus depreciation was amended and extended yet again by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100% first-year bonus depreciation. For 2012, bonus depreciation is still available, but the allowable deduction reverts from 100% to 50% of the eligible basis.
The short of this is that a business that installs a qualifying solar energy system in 2011 can enjoy a 100% bonus depreciation the first year the system is commissioned, rather than waiting for the entire 5 year depreciation schedule. Also, a 50% bonus depreciation is available through 2012.
Given the time value of money and the tough economic climate, this benefit helps make solar energy systems more accessible in the near-term by businesses that will be able to save significant fossil fuel energy costs over the life of the system.
In fact, between the treasury grant, bonus depreciation, and generous state rebates, many businesses (particularly heavy water users like inns and restaurants) can enjoy a year-one payback on solar energy systems!
- DSIRE – Modified Accelerated Cost-Recovery System (MACRS) + Bonus Depreciation (2008-2012)
- IRS Form 4562 – Depreciation and Amortization (Including Information on Listed Property) (PDF)
- IRS – Instructions for Form 4562 (PDF)
What Do Rebates Mean for Me?
Here are a few example solar energy projects to help illustrate how federal incentives affect solar energy economics.
Scenario #1- Residential SHW system
$10,500 installed cost
-$1,000 ME Solar Rebate (avg. $2,600 NH state rebate)
-$3,150 30% Fed Tax Credit
$6,350 Final Cost (40% savings with current incentives)
Scenario #2- Residential PV system 4kw (5,200 kWh/yr)
$19,000 installed cost
-$2,000 ME Solar Rebate (currently no NH state rebate)
-$5,700 30% Fed Tax Credit
$11,300 Final Cost (40% savings with current incentives)
Scenario #3- Commercial PV system
$100,000 installed cost
-$2,000 ME Solar Rebate (up to $50,000 in New Hampshire)
-$28,900 accelerated depreciation – avoided taxes over 5 years thanks to lowered net income, assumes 34% marginal tax bracket
-$30,000 30% Fed Tax Credit
$39,100 Final Cost (60% savings with current incentives)
Interested in learning more? Contact Revision Energy for a free consultation about how to take full advantage of the current government incentives available for renewable energy projects.