Solar Investment Tax Credit
Sections 48 (for businesses) and 25D (for residences) of the
Internal Revenue Code detail the federal ITC for certain types of
energy projects, including “equipment which uses solar energy to
generate electricity." Like other tax credits, the ITC reduces the
tax burden of individuals and commercial entities that make
investments in solar energy technology. On an industry level, a
long-term ITC provides consistent financial support for growth such
as building manufacturing plants, developing an installer workforce,
and investing in large-scale solar electric plants that require
extended planning and construction time.
For commercial projects, the ITC is realized in the year in which
the solar project begins commercial operations, but vests linearly
over a 5-year period (i.e., one-fifth of the 30% credit vests each
year over a 5-year period). Thus, if the project owner sells the
project before the end of the fifth year since the start of
commercial operations, the unvested portion of the credit will be
recaptured by the IRS. This period is sometimes referred to as the
5-year “clawback” period.
4.1.2 Renewable Energy Grants The EESA removed the cap on the ITC
for residential PV systems (previously $2,000), effective for
property placed in service after December 31, 2008. The bill also
allows individual taxpayers to use the credit to offset alternative
minimum tax liability. Another change to the ITC was to allow
regulated utilities to claim the tax credit, providing significant
support for increased utility investment in solar energy projects.
The ARRA enhanced the ITC further by allowing individuals and
businesses to qualify for the full amount of the solar tax credit,
even if projects receive subsidized energy financing. Previously,
the ITC would not apply to the portion of the investment funded via
subsidized financing such as below-market loans. Also, the ARRA
removed the $2,000 cap on the ITC for residential solar water
heating systems.
Renewable Energy Grants The EESA removed the cap on the ITC for
residential PV systems (previously $2,000), effective for property
placed in service after December 31, 2008. The bill also allows
individual taxpayers to use the credit to offset alternative minimum
tax liability. Another change to the ITC was to allow regulated
utilities to claim the tax credit, providing significant support for
increased utility investment in solar energy projects. The ARRA
enhanced the ITC further by allowing individuals and businesses to
qualify for the full amount of the solar tax credit, even if
projects receive subsidized energy financing. Previously, the ITC
would not apply to the portion of the investment funded via
subsidized financing such as below-market loans. Also, the ARRA
removed the $2,000 cap on the ITC for residential solar water
heating systems.
Section 1603 of the ARRA authorizes the Department of the Treasury
to issue renewable energy project developers cash grants in lieu of
the ITC. The grants program was created in response to the lack of
available financing and limited appetite for tax credits resulting
from the financial crisis and economic downturn. The program is
designed like the ITC and offers an equivalent 30% benefit based on
the cost of the solar property that is placed in service.
Grants are available for qualifying property that is placed in
service during 2009 and 2010. Solar projects that commence
construction by December 31, 2010, and are placed in service prior
to 2017 also qualify. Developers must apply for the grant by
September 30, 2011, and only taxpaying corporate entities are
eligible. Grant applications will be processed within 60 days from
the date it is received or the system is placed in service,
whichever is later.
There are several variables that determine whether a developer might opt to apply for a cash grant. These factors may include state and local incentives and mandates, project scale and required lead time for development, and the ability to monetize tax credits. The Treasury Department began accepting applications for grants on July 31, 2009, and the first payments were announced on September 1. By the end of November 2009, 65 solar projects had received funds, with allocations totaling more than $18 million.