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
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.
For more information: Doug Levin
Tax forms: Rising Sun