Despite the lack of sunshine this summer, tax incentives remain for businesses that invest in qualifying solar energy property. The commercial solar investment tax credit (the “ITC”) provides for a 30% tax credit for qualifying solar property placed in service by a company during a tax year. Businesses that purchase solar property may also avail themselves of accelerated depreciation deductions, thus further reducing their federal tax liability by deducting a larger portion of their solar investments in earlier years. Taken together, the ITC and accelerated depreciation deductions can create a powerful tax incentive for a business to invest in solar technologies.
Qualifying solar energy property includes equipment that uses solar energy to generate electricity (including solar panels), to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat. To qualify for the ITC, solar energy property must meet certain requirements. First, in the case of property purchased by a taxpayer, the original use of the property must commence with the taxpayer. In addition, depreciation or amortization must be allowable with respect to the property. A further condition is that property must meet any applicable performance and quality standards prescribed by the IRS that are in effect when the property is acquired.
The ITC was introduced a decade ago with the passage of the Energy Policy Act of 2005. The credit was initially set to expire at the end of 2007, but was extended for an additional year by subsequent legislation. An extension of the ITC through the end of 2016 was included in the Emergency Economic Stabilization Act of 2008. Unless Congress acts, the credit will drop to 10% for property placed in service in 2017 and thereafter.
Calculating the ITC and the accelerated depreciation deductions requires a working knowledge of applicable provisions of the Internal Revenue Code and accompanying Treasury Regulations. Businesses that invest in solar property are thus encouraged to consult with an experienced tax professional when claiming the credit.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.