COMMERCIAL SOLAR TAX BENEFITS
The commercial solar tax credit is in section 48(a) (energy credit) of the U.S. tax code.
The commercial solar credit is 30 percent of the “basis” that a company has invested in “eligible property” that is “placed in service” during the period 2006 through 2016. The commercial credit will drop to 10 percent of the basis for property put into service after December 31, 2016, but the credit will drop to zero for property put into service after that date, unless the deadline is extended again by Congress. A tax credit is a dollar-for-dollar reduction in the income taxes that the business claiming the credit would otherwise have to pay the federal government.
Determining what constitutes “eligible property,” when it is “placed in service,” and what is the “basis” in the property are among the keys to calculating the value of the commercial solar tax credit. Each of these items, along with additional special considerations, is discussed in detail in the following paragraphs.
The same solar equipment that qualifies for the commercial tax credit can usually be depreciated over five years on an accelerated basis, meaning the cost of the equipment can be deducted and the deductions are front loaded. When a 30 percent tax credit is claimed, only 85 percent of the equipment cost is subject to depreciation. The depreciable basis must be reduced by one half of the solar tax credit. The special depreciation allowance for solar equipment is in section 168(e)(3)(B)(vi)(I) of the U.S. tax code.
Solar equipment placed in service during the period 2008 through 2012 qualifies for a “depreciation bonus.” Equipment put in service after September 8, 2010 through December 31, 2011 qualified for a 100 percent bonus, meaning the owner could deduct the full depreciable “basis” in the equipment in the year it was placed in service. Equipment put in service during the rest of the period qualifies for a 50 percent bonus, meaning the owner can deduct half its depreciable basis in the equipment immediately and the other half is depreciated over five years. Since only 85 percent of the basis in equipment on which the 30 percent tax credit has been claimed can be recovered through depreciation, a 100 percent bonus allowed 85 percent of the equipment cost to be deducted immediately. A 50 percent bonus allows 42.5 percent of the equipment cost — half of 85 percent — to be deducted immediately. The bonus is supposed to act as a carrot to induce companies to make investments that they would not have made otherwise. Therefore, no bonus can be claimed on projects that were considered well underway before 2008 when the bonus was restored to the tax code.
The owner of any commercial solar project placed in service in 2009, 2010 or 2011 — or that starts construction during 2009, 2010 or 2011 and is completed by 2016 — has the option to forego the tax credit and receive a check for the cash value from the U.S. Treasury. These payments are referred to as “section 1603” payments after the section of the stimulus bill in February 2009 that authorized the payments. The owner would qualify for the same depreciation as if the owner claimed the tax credit.
See You Next Time! Dr. Stripling