Solar and Federal Tax Credits for Residential Systems
If you’ve looked into solar with any conviction, you’ve undoubtedlyreceived bids from solar contractors showing both gross system cost, aswell as, net system cost after all available incentives are factored in. The breakdown typically looks something like this, using arepresentative 5KW system with $1.50/AC watt rebate:
Solar PV system gross cost: $30,000
State/Utility Rebate: -$7,500
Federal Tax Credit: -$6,750
Solar PV system net cost: $15,750
This breakdown looks pretty good, doesn’t it? Heck, the governmentand utility are paying for 47.5% of your solar system!! But is this true in every case? Let’s take a closer look.
Chances are that your state/utility rebate is locked in. Most of the time, your solar contractor will ‘float the rebate.’ This is industrytalk for charging you the gross system cost LESS the rebate. In theabove example, your ‘out of pocket’ net cost (used to calculate theFederal Tax Credit) is $22,500. Thus, we can consider this rebatelocked in provided that your contractor calculated it correctly. Wildvariations in rebate amounts between solar contractors should be seen as a red flag warranting further analysis. However, if all of thecontractors are showing similar amounts you should feel confident thatyour rebate is all but assured.
The Federal Residential Energy Tax Credit is another matter entirely. Before assuming that you qualify for this ‘tax credit,’ you shouldspeak with your tax professional. Why? The solar federal tax credit is exactly that: a credit against taxes owed. In other words, to qualify, you must owe federal taxes. Let me repeat that: YOU MUST OWE FEDERALTAXES. This credit is NOT a line item deduction to lower your tax basis nor is it an automatic refund from the federal government. If you arenot paying taxes to the feds you cannot take the federal tax creditfor solar. Period. This is why it is so important that you have a solidunderstanding of your tax situation before moving forward with a solarpower system. Unfortunately, many solar contractors make theircustomers believe that the federal tax credit is a done deal. It’s not. Your tax professional will let you know how much tax credit you’reeligible for and how to go about filing for it (more on this later).
Another oft misunderstood element of the federal tax credit is thenumber of tax years one can roll the credit forward should one not beable to take the entire credit in the first year. For residentialcustomers, you have two years to take advantage of the credit. If youcan’t take it all in the first year, you can roll it forward to the next tax year. If you have any left over at the end of the second year, you lose it. That’s right: use or lose it. Under current tax code, thecredit expires December 31, 2016. This expiration date could haveserious implications for those who go solar in 2016 and can’t utilizethe entire tax credit in the first year.
I want to cover one last thing before I move on to your optionsshould you not be able to take any or all of the tax credit. Thefederal tax credit only applies to solar photovoltaic (electricityproducing) and solar domestic hot water (heating water for showers,kitchen, etc). It DOES NOT apply to thermal solar for pool or spaheating. In fact, very few, if any, incentives exist for pool/spa solar thermal. I guess the powers that be feel that heating pool water is aluxury unworthy of incentives. Whether you agree or disagree with thislogic, you’ll be hard pressed to find incentives to heat your pool using solar technologies.
So, what if you don’t qualify for the federal tax credit? The goodnews is that there are entities that are happy to take the tax creditfor you. The result of this arrangement is that you pay the NetNet price (line four in the above example). One such entity is SunRun. SunRun provides residential Power Purchase Agreements (PPAs) forphotovoltaic solar systems. When customers sign up for SunRun, SunRuntakes the rebate and the tax credit right off the top line beforecalculating either your monthly payment or pre-pay price. Even better,if one elects the pre-pay option, the final price is discounted anadditional 10%. In our example above, you’d take 10% off line four toarrive at your new ‘out of pocket’ price ($15,750 – 10% = $14,175.90). Additionally, SunRun provides twenty years of maintenance, monitoring,and warranty for all of their customers. SunRun can even help those who CAN take the tax credit but would like to take it now rather than wait. In summary, SunRun not only allows customers who cannot take thecredit to take it, but instantly monetizes the tax credit for those whootherwise qualify for the credit but don’t want to wait. This is alsotrue of the myriad photovoltaic lease products currently available onthe residential solar market.
Finally, if you do qualify for the tax credit and elect to take it,you’ll need to let the IRS know of your intent when you file your taxes. You’ll need to fill out IRS Form 5695 available for download from theIRS’s website: (http://www.irs.gov/pub/irs-pdf/f5695.pdf). Currently only the 2009 version is available. The 2010 version of IRSForm 5695 should be available shortly for those filing an April 2011return. This form contains explicit instructions about who qualifies,eligible technologies and improvements, and other general guidelines for claiming your tax credit.
If you’d like to learn more, additional information and FAQs areavailable on the Solar Electric Industry Association’s’ (SEIA) website: http://seia.org/galleries/pdf/SEIATaxManual_v3-0_FAQ.pdf
In closing, I’d like to reiterate the importance of seekingprofessional tax advice if you plan on making solar or other energyimprovements to your home. This is the only way you can be certain ofyour eligibility. Options such as SunRun allow one to take advantage ofthe tax credit even if one doesn’t qualify and can also be a good option for those who do but don’t want to wait to receive the benefit. Thatlast thing you want is to install a solar system only to discover laterthat you can’t take the tax credit. Be diligent in your examination ofthe issue. The Federal Tax Credit is a big piece of the solar energyincentive pie that you definitely want to take advantage of fully.
By Scott Gordon
Vice President, Sales Residential, HelioPower
You can reach Scott Gordon directly at SGordon@HelioPower.com
HelioPower has been engineering solar power solutions for residential, commercial, community and utility scale partners since 2001. The company’s team of engineers and solar power professionals are passionate about excellence in all phases of a project, from customer communication and education to site analysis, design, system implementation and finally to performance monitoring. HelioPower has designed and installed over 1000 solar power systems in the Western States, and serves clients worldwide. The Helio Sustainable Energy Blog is our commitment to distribution helpful dedicated to information about saving energy and generating green electricity through solar power systems.
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