Tax credits

Solar Tax Credits (Commercial)

Chris Mentzel

The information in this article is purely informational in nature. The author is not a tax professional and cannot give tax advice. The article was put together from information supplied by tax advisor Doug Levin. For advice, please contact him or your tax advisor.

The tax benefits of a solar photovoltaic energy system are threefold in nature. There is a federal tax credit of 30%, a state tax credit of 35% and accelerated depreciation within 5 years. Together they can repay up to 100% of the purchase cost of the solar energy system. There are specific limitations on active/passive income that need to be evaluated by your tax advisor.

The federal tax credit can be taken in the year that the system becomes operational. Your federal income tax payment can be reduced by 30% of the total system cost. This applies even if you are subject to the AMT (alternative minimum tax), where max tax credits fail. You can choose to apply up to 50% of the credit to last year's taxes and carry the unused amount forward for 15 years.

The state tax credit can be taken in the year that the system becomes operational. Your state income tax payment can be reduced by 35% of the total system cost. This does not apply to other state taxes, only the income tax. The amount of the credit taken is limited to $500,000. Unused credit can be applied in subsequent years until exhausted. If you do not owe much state income tax, a 24.5% refundable tax credit can be chosen that will be result in a check from the State of Hawaii the year after the system has been put into operation.

Most of the system cost can also be depreciated over five years and the rules event let you depreciate much of the cost that have already been returned by the tax credit. 85% of the system cost can be used to lower your earnings before your federal income tax is calculated. At a 35% tax rate that will save you 29.75% on your federal taxes. 65% of the system costs can be used to lower your earnings before your state income tax is calculated. At a 8.25% tax rate you will save 5.4% on your taxes. If you elect the 24.5% refundable tax credit, you can use 75.5% against income, saving you 6.23%.

If you add 30+35+29.75+5.4% together, you will see that 100.15% of the solar energy system is paid for by tax credits and tax savings.

For the refund option, add 30+24.5+29.75+6.23 to receive 90.48%.

A complete analysis needs to consider the cost of money before tax benefits are received and the reduction of the state tax when deducted from the federal tax in the next year.