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Keeping Your Balance: Business advantages of solar energy: tax credits

John Finocchario

John Finocchario

With the green initiative in full swing around the country, more and more companies are beginning to examine the advantages of using solar or other renewable fuels in the operation of their business. In addition to the goodwill of decreasing a business’ carbon footprint, many companies are realizing that using solar energy can provide a reduction in operating costs through lower electric costs.

More importantly, through subsidies, grants and tax credits, the out of pocket costs of purchasing and installing energy efficient systems is not nearly as much as one may think. The tax benefits alone for going solar can provide a significant savings in the cost of installing the solar equipment.

The Business Energy Investment Tax credit provides for a 30 percent tax credit on costs incurred for solar energy property, fuel cells, or wind turbines. A 10 percent credit is provided for costs incurred on geothermal systems, microturbines, and combined heat and power systems.

To qualify as energy property, property must:

1. Meet the requirements and quality standards, if any, provided by the regulations;

2. Be property for which depreciation is allowable; and

3. Be property either:

a. The construction, reconstruction, or erection of which is completed by the taxpayer; or

b. Acquired by the taxpayer if the original use of such property must begin with the taxpayer.

The energy credit also provides for many other advantages that you would often not see with a federal business tax credit. The first being that the depreciable basis of the property only needs to be reduced by 50 percent of the amount of the energy credit claimed. That means that you will also get a federal tax deduction on 85 percent of the costs incurred.

With the favorable depreciation provisions which apply through 2013, taxpayers could write off as much as 100 percent of the remaining basis in the first year by utilizing the Section 179 deduction. Currently, Section 179 allows a first year deduction up to $500,000. If a taxpayer is limited by or not eligible to take a Section 179 deduction, bonus depreciation provisions allow for a 50 percent first year deduction.

In 2014, the Section 179 limit reverts back to $25,000 and the bonus depreciation provisions expire altogether. It is unknown whether any legislation will extend either of these provisions. Even if no legislation is passed, solar property qualifies for a favorable depreciable life of only five years.

Another favorable aspect of the credit relates to basis reduction due to subsidized energy financing. Previously, the rules stated that the basis of the property purchased must be reduced by any subsidized energy financing for purposes of calculating the credit. This meant that only out of pocket costs would be eligible for the credit.

For property acquired after Dec. 31, 2008, the rules have changed and there is no longer a basis reduction for amounts financed by subsidized energy financing. The change in the rule now may allow a taxpayer to claim a 30 percent credit on costs that were subsidized and not spent out of pocket.

Another important favorable difference for the energy credit, which differs from other general business credits, is the fact that the credits can be used to offset the Alternative Minimum Tax.

The energy credit is not refundable. Any excess credit earned during a tax year can be carried back one year and then forward for 20 years.

As you can see, for a business which may benefit from the lower energy costs that solar energy may provide, the high costs of installing the necessary systems may be able to be significantly mitigated. For example, a company who receives $100,000 in grants to install a $300,000 solar energy system will generate $90,000 in energy credits. Before considering depreciation deductions, potential state investment tax credits, or the energy cost savings, the cost of the system for a profitable company is already 63 percent paid for.

The Business Energy Tax Credit can provide significant savings when it comes to purchasing solar and other renewable fuel property. Solar energy may not be practical or beneficial for all companies, but for those who it may benefit, it is important to understand the potential tax benefits of going green. The tax consequences of investing in solar property can be complex. Please consult your tax advisor.

John Finocchario, CPA, is a manager in the tax department at Mengel, Metzger, Barr & Co. LLP. He may be reached at