Solar Energy and Federal Tax Credits for Residential Solar Systems

By Scott Gordon

Vice President, Sales Residential, HelioPower

So, you’re thinking about installing a solar system on your home.  Depending upon where you reside, you may be eligible for state rebates, state tax credits, utility rebates, SRECS (solar renewable energy credits), and even local city cash grants, low interest loans, zero cost permits, and property tax assessment waivers. The incentives are dizzying in their breadth and depth and vary widely from locale to locale across this great nation.  However, regardless of where you live in the United States, anyone installing solar photovoltaics (PV) and/or SDHW (solar domestic hot water) as part of their energy generation mix is eligible to receive the Federal Residential Energy Tax Credit. This blog examines the Residential Energy Tax Credit and how it applies to those seeking to take advantage of it.

If you’ve looked into solar with any conviction, you’ve undoubtedly received bids from solar contractors showing both gross system cost, as well as, net system cost after all available incentives are factored in. The breakdown typically looks something like this, using a representative 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 government and 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 industry talk for charging you the gross system cost LESS the rebate.  In the above example, your ‘out of pocket’ net cost (used to calculate the Federal Tax Credit) is $22,500.  Thus, we can consider this rebate locked in provided that your contractor calculated it correctly.  Wild variations in rebate amounts between solar contractors should be seen as a red flag warranting further analysis. However, if all of the contractors are showing similar amounts you should feel confident that your 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 should speak 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 FEDERAL TAXES.  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 are not paying taxes to the feds   you cannot take the federal tax credit for solar. Period. This is why it is so important that you have a solid understanding of your tax situation before moving forward with a solar power system.  Unfortunately, many solar contractors make their customers 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’re eligible for and how to go about filing for it (more on this later).

Another oft misunderstood element of the federal tax credit is the number of tax years one can roll the credit forward should one not be able to take the entire credit in the first year. For residential customers, you have two years to take advantage of the credit.  If you can’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, the credit expires December 31, 2016. This expiration date could have serious implications for those who go solar in 2016 and can’t utilize the entire tax credit in the first year.

I want to cover one last thing before I move on to your options should you not be able to take any or all of the tax credit.  The federal tax credit only applies to solar photovoltaic (electricity producing) and solar domestic hot water (heating water for showers, kitchen, etc). It DOES NOT apply to thermal solar for pool or spa heating.  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 a luxury unworthy of incentives.  Whether you agree or disagree with this logic, 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 good news is that there are entities that are happy to take the tax credit for 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) for photovoltaic solar systems. When customers sign up for SunRun, SunRun takes the rebate and the tax credit right off the top line before calculating either your monthly payment or pre-pay price.  Even better, if one elects the pre-pay option, the final price is discounted an additional 10%.  In our example above, you’d take 10% off line four to arrive 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 the credit to take it, but instantly monetizes the tax credit for those who otherwise qualify for the credit but don’t want to wait.  This is also true of the myriad photovoltaic lease products currently available on the 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 the IRS’s website: (http://www.irs.gov/pub/irs-pdf/f5695.pdf). Currently only the 2009 version is available.  The 2010 version of IRS Form 5695 should be available shortly for those filing an April 2011 return. 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 are available 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 seeking professional tax advice if you plan on making solar or other energy improvements to your home. This is the only way you can be certain of your eligibility. Options such as SunRun allow one to take advantage of the 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. That last thing you want is to install a solar system only to discover later that you can’t take the tax credit. Be diligent in your examination of the issue.  The Federal Tax Credit is a big piece of the solar energy incentive pie that you definitely want to take advantage of fully.

You can reach Scott Gordon directly at SGordon@HelioPower.com

Scott Gordon

Scott Gordon

President at HelioPower
Scott Gordon

@repioneer

SVP Sales, HelioPower Energy Solutions
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