Understanding and Applying the Energy Policy Act of 2005

This information is the result of a thorough and extensive review of the legislation, all relevant IRS, governmental, accounting, and industry literature, including the Solar Energy Industry Association (SEIA) Guide, as well as correspondence with SEIA personnel. This information represents a summary overview of the Residential Solar PV Tax Credit.

What Is The Residential Solar PV Tax Credit?
In August, 2005, congress passed the Energy Policy Act of 2005. This is a broad piece of legislation covering a variety of energy conservation issues. One highlight of this legislation is the establishment of a tax credit for taxpayers who invest in residential solar photovoltaic (PV) systems.
What Is Eligible For The Credit?
In its simplest sense, the solar PV tax credit applies to money you spend to purchase and install a solar PV system to generate electricity for use in your U.S. residence. Components, materials and labor apply, but only when the system (items) are actually installed. For additional details on eligibility requirements, contact our sales personnel.
How Much Of My System Cost Qualifies?
All necessary components, and materials and labor (site preparation, assembly and original installation, and wiring, etc) necessary to the point of electrical distribution or to connect to the individual’s home system are eligible. For battery-based solar systems, the AC output for the inverters is a safe eligibility cut-off point. Eligible components would include the solar panels, array frame, DC wiring and distribution, battery bank, and inverter. Portions of the system (i.e. battery or inverter) that share other power generation sources (such as wind, hydro, or generator) must be allocated. Please contact our sales staff for further details.
How Much Is the Tax Credit?
The tax credit is 30% of the eligible expenditures. IMPORTANT — this is a direct credit to your tax liability, not just a reduction in your taxable income.
When Can The Tax Credit Be Taken?
The credit can be applied to your 2006 federal income tax for systems/items installed during 2006. The credit can be applied to your 2007 federal income tax for systems/items installed during 2007. Systems/items installed prior to January 1, 2006 or installed after December 31, 2007 do not qualify for the tax credit.
Is There a Limit To the Credit?
Yes. The law states that the maximum credit allowed “for the taxable year” is $2,000.00. Since the credit is available for the tax years 2006 and 2007, a reasonable interpretation is that the limit is $2,000 per year, for a total of $4,000. At this point, however, it appears that both Congress and the IRS are defining the tax credit maximum as a $2,000 total for the two year period. Please contact us for up-to-date information and additional details on eligibility requirements and maximum limits.
Will An Expansion To My Existing System Qualify?
The law is clear that the components must consist of the original installation of new equipment. There is no indication that the purchase and installation of an upgrade or expansion of an existing PV system, or the addition of PV to an existing remote system, does not qualify (subject to the same requirements and restrictions as new installations). However, this issue is not yet clearly defined. For current and additional details on these requirements, contact our sales personnel.
Does My Existing (or new) System Have To Be Exclusively PV?
No. But only the portion installed that applies (in whole or part) to solar PV will qualify as eligible property for calculating the Solar PV Tax Credit.
Can Both My Spouse And I Take Credits?
Probably not. The law states that multiple individuals jointly occupying a residence are to be treated as one taxpayer for purposes of the solar tax credit.
Will My New Solar Grid Tie System Qualify?
If by “grid tie” you mean a strictly grid sell-back system, as in the new GVEA SNAP program, your system is inherently a commercial system. It would normally be to your advantage to structure the system as commercial and treat it as such for purposes of the Solar PV Tax Credits. The 30% also applies (for commercial systems placed into service during 2006-2007) but there is no dollar limit to the commercial solar tax credit. The Commercial Solar PV Tax Credit program is not addressed here so please contact our sales staff for details regarding this program.
What Parts Of My System Do Not Qualify?
1) Other power generation sources (wind, hydro, generator) up to the point of interconnect. Typically, the interconnect point in a hybrid system would be the battery bank. 2) Electrical loads such as appliances.
Would A Water Pumping System For My Cattle Qualify?
First, is the stock watering activity in conjunction with a commercial enterprise? If it is, the system would fall under the commercial PV solar tax credit guidelines.The residential regulation states that “qualified property” is that which “uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.” It is anticipated that the defining criteria will be the residential electrical system. Using this criteria:
·If the solar PV provides (or helps provide) electricity to the residence, it qualifies.
·If the PV application is remote with no practical way to connect to the residential electrical system (i.e. water pumping in a remote pasture), it probably will not qualify.
·If the solar PV is installed as an alternative to connecting the application to your residential electrical system and is, therefore, an independent system that could be, but is not, connected to the residential electrical system, we enter another area that has not been defined. It is hoped that this will also qualify, but the determination has not been made by the IRS on this issue. Check with us or your tax preparer for further updates on this issue.
Does A Solar PV System For My Recreational Cabin Qualify?
The law states that the system must relate to a dwelling you use as a residence. It does specify or restrict the type of dwelling. Nor does it specify that it be a primary or permanent residence. Absent rulings to the contrary, primary residences, summer (or winter) homes, recreational cabins, summer camps, boats, motor homes, etc that are used as a residence by the taxpayer should all qualify as dwellings. The credit is attached to the taxpayer, though, so you are limited to a credit for one system.
What is A Tax Credit and How Is It Applied?
A tax credit is a direct reduction in your federal tax liability. All prepayments (estimated tax payments, employment withholding, etc) are then applied. Example:
tax liability (line 63 on Form 1040) $ 8,000.00
less eligible solar PV tax credit ($2,000.00)
new tax liability $ 6,000.00
less other credits and prepayments ($XXXX)
Amount Owed (or Refund) $XXXX
Do I need to Itemize to Claim The Credit?
No. But you do need to calculate your Alternative Minimum Tax (AMT) liability. The solar PV tax credit cannot be used to reduce your tax liability below the AMT.
If I Am Paying the AMT, What Happens To The Solar Tax Credit?
You can carry the solar tax credit forward until the year in which it can be applied. A time limitation for this carry forward is not specified. There is no carry-back provision for the residential solar PV tax credit.
How Does The Solar PV Tax Credit Help Me?
The initial capital cost for solar PV systems is the major economic hurdle. PV systems have a very long life and, once installed, are very low maintenance. So the Solar PV Tax Credit directly impacts the major obstacle to purchasing and installing a PV system.
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