Q & A: Accounting for PV System Rebates
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Until recently, I assumed that federal tax credits for PV systems were based on the net cost of the system after subtracting any utility rebates. But a newsletter I received indicates that the 30% investment tax credit is based on the total PV system cost, before subtracting the state incentive. Is this accurate?
This depends on whether your customer is a homeowner or a business. The distinction hinges on the terms personal tax credit and investment tax credit. The Database of State Incentives for Renewable Energy (DSIRE) makes this distinction, for example. On the DSIRE Web site (dsireusa.org), the “Residential Renewable Energy Tax Credit” is described as a personal tax credit, whereas the “Business Energy Investment Tax Credit” is identified as a corporate tax credit. Personal and corporate tax codes are quite different, specifically with regards to the way one accounts for utility rebates.
Homeowners. For most homeowners who purchase a grid-tied PV system, there are two principal financial incentives: a rebate and the federal tax credit. The rebate is usually available from the utility to which the system is connected. The federal tax credit takes the form of a personal tax credit (PTC) that is available to the homeowner.
When a rebate is available from the utility company, the rebate is treated as a purchase price reduction. This means that the value of the rebate is subtracted from the total purchase price, resulting in a net adjusted cost for the purposes of determining the value of the federal tax credit. So, for homeowners the value of the PTC is calculated as follows, where P is the purchase price and R is the rebate amount:
PTC = (P – R) x 30%
Prior to January 1, 2009, the federal tax credit for homeowners was capped at $2,000. This made for pretty simple math, since this cap was reached on all but the smallest PV systems. For example, assuming a rebate of $3.50 per watt, a purchase price of $12,750 ($8.50/watt) and a 2008 placed-inservice date, the $2,000 cap for the Residential Renewable Energy Tax Credit is exceeded even on a 1.5 kW grid-direct PV system:
PTC = ($12,750 – $5,250) x 30%
PTC = $7,500 x 0.30
PTC = $2,250 ≥ $2,000 cap
With the passage of the Emergency Economic Stabilization Act of 2008, the $2,000 cap on the PTC for PV systems was lifted, and tax credits for solar were extended for 8 years. Residential grid-tied PV systems installed between January 1, 2009 and December 31, 2016 qualify for a full 30% tax credit. For a 5.6 kW PV system with a purchase price of $46,200 ($8.25/watt) and a 2009 placed-in-service date, an additional $5,980 PTC ($7,980 - $2,000) results compared to a 2008 placed-inservice date, under the same $3.50 per watt rebate:
PTC = ($46,200 – $19,600) x 30%
PTC = $26,600 x 0.30
PTC = $7,980
Two items are worth noting before we look at how the federal tax credit is calculated for businesses. First, according to version 2.0 of the Solar Energy Industries Association (SEIA) Guide to Federal Tax Incentives for Solar Energy, “Most rebates from state governments or non-profit organizations do not reduce the basis for the federal credit.” So make sure you know where your rebate comes from and its tax classification. Second, dwelling units with a home office serve a dual residential and commercial purpose. So while depreciation in general is unavailable to homeowners, those with an in-home business may be able to depreciate the portion of the PV system that qualifies according to the IRS as commercial property, usually on the basis of a square foot determination.
Businesses. In addition to rebates and federal tax credits, commercial customers who purchase grid-tied PV systems are also entitled to a third major financial incentive: depreciation. Depreciation is a mechanism for spreading out the cost of acquiring large capital items over time. Solar projects, even though they have a 25-year service life, qualify for 5-year accelerated depreciation. Furthermore, systems placed in service in 2008 and 2009 also qualify for bonus depreciation. These PV systems are still depreciated over 5 years, but they can take 50% the first year and 12.5% in each of the succeeding 4 years. Originally, the bonus depreciation of 50% in year one was available only for systems placed in service in 2008, and it expired on January 1, 2009. But the American Recovery and Reinvestment Act, signed into law by President Obama on February 17, 2009, reinstates bonus depreciation for PV projects completed in 2009.