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Tax Credits

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Description


An investment tax credit provides a direct reduction in a taxpayer’s tax liability for a portion of the cost of purchasing and installing a solar-energy system. Historically, the U.S. federal government and state governments have used tax credits as one of the predominant tools to encourage renewable-energy development. Although solar tax credits are typically federal and state policies, municipal governments that impose income, franchise, or other similar taxes can consider credits or exemptions to encourage solar adoption.

Tax credits are fairly easy to administer compared to other financial incentives, and they are generally more politically viable than direct cash incentives because tax credits usually do not require an annual appropriation. If tax credits are successful in expanding markets, they can ultimately result in a net gain in public revenue. One of the weaknesses often attributed to tax incentives is that entities without a tax liability, such as government agencies, non-profits and schools, are not directly eligible. In addition, system owners or investors with limited state tax burdens may not be able to take full advantage of state tax credits. In recent years, third-party system ownership of photovoltaic (PV) systems combined with power-purchase agreements[1] and other financing models have helped mitigate these obstacles.

Although state tax credits may not be the primary motivating factor influencing purchasing decisions, they may help “seal the deal.” This policy option can be especially helpful in states where public benefits funds or other direct funding sources are not available.[2]  A few states also offer small production tax credits for solar, although these credits are typically very modest and are not major drivers of solar development.


Status & Trends

Around 20 states offer personal and/or corporate investment tax credits to help offset the expense of purchasing and installing solar energy equipment. Tax credits generally range from 10% to 50% of project costs. The maximum credit generally ranges from $500 to $35,000 for residential systems and from $25,000 to $60 million for commercial systems. State solar tax credits typically apply both to solar-electric and solar-thermal systems, and in a few cases to passive solar as well.

In recent years, tax credit eligibility requirements have begun to mirror rebate requirements in some respects. For example, Arizona, Georgia, New Mexico, and Rhode Island require applications and pre-approval to receive a tax credit. Furthermore, several states have set minimum thresholds for system warranties, equipment and installer qualifications, and orientation and shading. Kentucky requires that PV installers are NABCEP-certified and that equipment carry a manufacturer’s warranty of at least five years. In Louisiana, those claiming a credit must submit, among other things, a copy of the modeled PV array output report using the PV Watts Solar System Performance Calculator and a copy of a solar site shading analysis demonstrating the suitability of the site for a solar installation.

Detailed, state-by-state comparison tables of tax credits that support photovoltaic (PV) systems and solar water-heating systems are available here:
 
 
The best practices described for direct cash incentives are generally applicable to tax credits as well. In addition, a few states have created provisions to extend tax credit benefits to non-tax-paying entities. Arizona’s non-residential solar tax credit allows a third party that finances and installs a solar-energy system on a tax-exempt organization’s facility to claim the credit, which results in lower overall project costs for the organization. This type of arrangement, in which a third party owns and operates a system on a public building and sells the electricity through a power-purchase agreement, is very common. Extending tax benefits to systems on public buildings can benefit municipalities seeking to install solar on their own facilities. Some states also explicitly allow third-party owners to take advantage of tax benefits. In Arizona, Georgia, Hawaii, Iowa, Louisiana, New York, North Carolina, North Dakota, Oklahoma, Oregon and Rhode Island, third-party owners or leasing companies are allowed to take the state tax credit for installing a solar-energy system.

States have broadened tax credit programs in other ways to encourage solar markets. For example, while most tax credit programs target project owners, a few states, including Rhode Island, allow a homebuilder that installs a solar-energy energy system to claim the credit, in an effort to encourage the construction industry to integrate solar into new developments. Installing solar during building construction rather than as a retrofit improves the economics of rooftop solar.


Examples

  • Louisiana provides a 50% tax credit on the first $25,000 of the cost of residential solar-electric and solar-thermal systems. The credit may be applied to personal, corporate or franchise taxes, depending on the entity which owns the property, but the system must be installed at a residential facility. Unique among state tax credits, Louisiana’s credit provides that any credit amount that exceeds the taxpayer's liability for that year is treated as an overpayment, and the Louisiana Department of Revenue will issue a refund for the remaining amount. Other states with tax credits typically allow the carryover of unused credit rather than refunding the excess amount. Louisiana's tax credit rules address equipment requirements, including SRCC certification for solar-thermal equipment. Furthermore, systems must be installed by a licensed contractor, the owner of the residence, or by a person who has received certification by a technical college in the installation of such systems. Applicants must provide documentation of the suitability of their site for a solar installation.

Resources


[1]  A company installs and owns a solar system on a host customer’s property, and sells the electricity generated by the system to the host customer for a specified period of time. The third-party investor utilizes the financial incentives available for the solar-energy system (e.g. tax credits, rebates). These third-party power-purchase agreements (PPAs) are commonly used by entities that cannot utilize tax incentives, entities that prefer not to own and maintain a system, and entities that lack financial capital to purchase equipment.
[2]  Case Studies on the Effectiveness of State Financial Incentives for Renewable Energy, Susan Gouchoe, Valerie Everette and Rusty Haynes. North Carolina Solar Center and National Renewable Energy Laboratory (NREL), 2002.



 

 




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Disclaimer: The information presented on the DSIRE web site provides an unofficial overview of financial incentives and other policies. It does not constitute professional tax advice or other professional financial guidance, and it should not be used as the only source of information when making purchasing decisions, investment decisions or tax decisions, or when executing other binding agreements. Please refer to the individual contact provided below each summary to verify that a specific financial incentive or other policy applies to your project.

While the DSIRE staff strives to provide the best information possible, the DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. make no representations or warranties, either express or implied, concerning the accuracy, completeness, reliability or suitability of the information. The DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. disclaim all liability of any kind arising out of your use or misuse of the information contained or referenced on DSIRE Web pages.

Copyright 2013 - 2014 North Carolina State University, under NREL Subcontract No. XEU-0-99515-01. Permission granted only for personal or educational use, or for use by or on behalf of the U.S. government. North Carolina State University prohibits the unauthorized display, reproduction, sale, and/or distribution of all or portions of the content of the Database of State Incentives for Renewables and Efficiency (DSIRE) without prior, written consent.