Does the Sun Shine on your Tax Return?  It Could!

Marie Millard, CPA, Tax Manager   email
July 2010

In recent years, Congress has adopted many tax incentives that encourage taxpayers to become more energy efficient and to consider using alternative energy sources.  Energy costs are a significant expense for most businesses.  As your business seeks to manage its energy costs, it is also important to be cognizant of various energy tax incentives.
There are several types of property that qualify for business energy credits.  Each energy credit is a certain percentage of the basis of each energy property placed in service in the tax year.  Except as otherwise noted, these credits are generally available through December 31, 2016.

Solar Energy Credits

One alternative energy application that has seen an increase in activity in recent years, in part perhaps due to the expanded tax breaks, is the installation of solar energy property.  Taxpayers can receive up to a 30 percent federal energy tax credit in the year the solar panels are installed.  Below are some of the details on this credit.  

Definition of Solar Energy Property

There are two types of solar energy property.  The first type is equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.  The second includes equipment that uses solar energy to generate electricity, heat or cool (or provide hot water for use in) a structure, or provide solar process heat (but not to heat a swimming pool).

Eligibility

The 30 percent is applied to the basis of the solar energy property acquired by the taxpayer after December 31, 2005, and before January 1, 2017.  There is no cap on the amount of qualifying property a taxpayer may acquire and place into service.  

Limitations/Exceptions

Prior to tax law changes in 2008, the energy credit was limited by a taxpayer's Alternative Minimum Tax (AMT).  Starting in 2009 the energy credit can be used against a taxpayer's AMT, which will likely provide a significant tax break, especially for individual taxpayers who are often in AMT situations.  Further, any excess energy credit is available to be carried back one year and forward for 20 years.  

How to Claim the Credit

The solar energy property credit is reported on IRS Form 3468 (page 2, line 11b for the 2009 form).   

Example

Bucky Corporation (an S Corporation) installs solar energy panels in 2010 on the roof of its building at a cost of $400,000.  Barry, Bucky Corporation's 100 percent shareholder, has a net income tax liability for the year of $160,000, including $10,000 in AMT.  How much of an energy tax credit can Barry realize from the solar panels?

The solar panels would generate a tax credit of $120,000, or 30 percent of the $400,000 cost.  The overall limitation for the energy credit for 2010, as a result of the recent changes, would be $128,750.  Thus, in this example, Barry could claim the entire $120,000 tax credit on his 2010 tax returns and be left with a tax liability of $40,000 for the year.   

The above only addresses the federal energy tax credit for solar energy property.  It does not incorporate any potential state energy tax credits.  It also does not include any local utility programs or other incentives for acquiring solar energy property.  Thus, there may be several other cash flow benefits for installing solar energy panels in addition to utility cost savings.  For more information on how to generate savings through financial incentives, visit www.focusonenergy.com and www.energystar.gov.

Additional Energy Credits

In addition to solar energy property the following credits are available and can generate energy savings.

• 10 percent for geothermal deposits - This is equipment used to produce, distribute, or use energy derived from a geothermal deposit.  There is no time limit on the ability to claim this credit.
• 10 percent for geothermal heat pump systems - This is equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.
• 10 percent for combined heat and power system property - This is a system that uses the same energy source for the generation of electrical power, mechanical shaft power, or both in combination with the generation of steam or other forms of useful thermal energy.
• 30 percent for qualified microturbine property - This is a stationary microturbine power plant with a nameplate capacity of less than 2,000 kilowatts that has an electricity-only generation efficiency of not less than 26 percent at International Standard Organization conditions.  A credit for qualified microturbine property cannot exceed $200 for each kilowatt of the property's capacity.
• 30 percent for small commercial wind property - This is property that uses a qualifying small wind turbine to generate electricity.
• 30 percent for qualified fuel cell property - This is a fuel cell power plant with a nameplate capacity of at least 0.5 kilowatt of electricity using an electrochemical process, and an electricity-only generation efficiency of greater than 30 percent.  The credit cannot exceed an amount equal to $1,500 for each 0.5 kilowatt of capacity.

As companies continue to evaluate their energy costs, the possible savings available through federal tax benefits (and other incentives) may make solar energy property or other energy property a viable option.  These sizable tax savings would reduce the payback period for these capital expenditures and may be something for your business to consider.  

If you have any questions, please contact Marie Millard at mmillard@KolbCo.com or 262/754-9400, ext. 251.