FAQs – Solar Tax Questions

Q:What is the Investment Tax Credit (Section 48 Credit)?

A:One of the principle federal incentives for developing and installing solar power is the investment tax credit (ITC) designated as the energy tax credit under Section 48 of the Internal Revenue Code (Code). The ITC provides a dollar for dollar tax credit, with certain limitations, equal to 30% of qualified solar costs. The ITC can be used to offset both regular and alternative minimum tax (AMT) and may be taken over two years[1].

Q:What is a Renewable Energy Grant?

A:The American Recovery and Reinvestment Act of 2009 (H.R. 1), enacted in February 2009, created a renewable energy grant program that is administered by the U.S. Department of Treasury. This cash grant may be taken in lieu of the ITC. Grants are available for eligible property placed in service in 2009 or 2010, or placed in service by the specified credit termination date, if construction began in 2009 or 2010. The guidelines include a “safe harbor” provision that sets the beginning of construction at the point where the applicant has incurred or paid at least 5% of the total cost of the property, excluding land and certain preliminary planning activities. The grant is equal to 30% of the basis of the property for solar energy. Eligible solar-energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Only tax-paying entities are eligible for this grant; federal, state and local government bodies, non-profits, qualified energy tax credit bond lenders, and cooperative electric companies are not eligible to receive this grant.

Q:What is MACRS Depreciation?

A:Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. A number of renewable energy technologies are classified as five-year property (Code § 168(e)(3)(B)(vi)) under the MACRS (see Code § 168(e)(3)(B)(vi)).    The 5-year recovery schedule for most types of solar property has been in place since 1986.

Q:What type of income may be offset by PV System tax losses?

A:Individuals and personal service corporations (i.e., certain corporations whose owners perform services in the fields of accounting, actuarial science, architecture, consulting, engineering, health, veterinary services, law, and performing arts) generally can use tax losses from their investment in PV Systems to offset tax liability from passive activity income. Closely-held corporations (i.e., corporations for which more than half the stock is owned by five or fewer individuals) may use PV System tax losses and the ITC against their tax liability from active but not portfolio income.  Other corporations may use PV System tax losses and the ITC against any income tax liability.

Q:What is Passive Activity Income?

A:Passive Activity Income is income from a passive activity.  A passive activity is any activity in which the taxpayer does not materially participate. This includes most rental activities and investments in partnerships, LLCs, etc., in which the taxpayer is not directly involved with the operations.  Passive activity income also includes gains or losses from the sale of a passive investment. Items of income that would NOT qualify as passive activity income include wages, 1099 or Schedule C income, portfolio income (stocks, bonds, dividends), annuities, interest, etc.[i]

Q:What are the Passive Activity Rules?

A:Individuals, personal service corporations, and closely-held corporations are subject to the passive activity rules of Code § 469.  Accordingly, to the extent an investment in a PV System is deemed to be a passive investment, any net losses from such an investment are deductible only against passive activity income.   Disallowed passive activity losses may be carried forward until used. If an investor disposes of their entire interest in the PV Systems in a fully taxable transaction (e.g., an exchange pursuant to exercise of the Solar Asset Purchase Option), the investor may use any previously disallowed passive activity losses and any then current passive activity losses against the investor’s nonpassive income in the year of such disposition.

Q:What are the At-Risk Rules?

A:Individuals, estates, trusts, and closely-held corporations are also subject to the at-risk rules of Code § 465.  Under these rules, tax losses from an investment in a PV System are allowable only to the extent of the amount at risk with respect to the investment in the PV System. The amount at risk generally would be the adjusted basis in the PV Systems reduced by the amount of the previously allowed deductions from the PV Systems. Deductions disallowed under the at-risk rules can be carried forward indefinitely.

[1] Subject to passive activity rules and other limitation. Please consult your tax advisor for individual applicability.

IRS Circular 230 Disclosure: To comply with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained herein (including any attachments), unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter herein.