Photo: Flickr/David Reber's Hammer Photography

It’s a new year… and a new opportunity to take advantage of the 30% federal tax credit for solar thermal and solar PV systems.

Below are PDF links to the two 2010 IRS forms used to apply for the 30% solar investment tax credit. As discussed last year, there is some confusion about how to apply the 30% tax credit. Some customers multiply the 30% by the gross cost of the installed system, while others calculate the 30% times the cost after the cost of any state or utility rebate has been subtracted.

So which formula is correct? The short answer is that it depends on whether you’ve bought your solar system as a business or a home owner, or whether or not you’ve directly received any rebate cash.

To clarify, below is another recap of what we know. However, please confirm all of this with your own tax consultant. FYI, we’re basing this information on this FAQ document from the Solar Energy Industry Association (SEIA), which consulted a reputable tax adviser.

For Businesses

• If you are a commercial business, you must calculate the 30% from the gross amount before any state or a utility rebates. However, as a business, you must also report any rebate amount received as income.
• Thus, any rebate money received by the state must be reported and will be taxed at the prevailing rate.
• For example. If your gross solar thermal system cost is $50,000, you will receive a $15,000 tax credit that you can use toward paying your Federal income taxes.
• This $15,000 is not a tax deduction, but a tax credit. Think of that $15,000 as if you’ve received an IRS Gift Card that you can use toward paying your next tax bill.
• Tax credits are thus far not refundable, however, so if you owe less than $15,000, as in this example, the remaining solar tax credit can be carried over to the next quarter’s tax bill.

For Homeowners

• If you are a solar water heating homeowner, you must calculate the solar 30% Federal Tax Credit after deducting any State or Utility rebates. Perhaps this sounds unfair, compared to businesses, but wait. Here’s the bonus:
• Residents don’t have to report any State or utility solar rebates as income. Instead, it is viewed as a “reduction” in cost. That’s sort of like a sale, but not really.
• For example, if your solar hot water or solar thermal system cost $5,000 installed, and then you receive a $2,000 rebate, then your “tax basis” would be $3,000. Thus, your Federal tax credit would equal $900 (30% x $3000 = $900.)
• As with commercial systems, this $900 is not a tax deduction, but a tax credit. So it’s as if you’ve received an IRS Gift Card of 900 bucks that you can use toward paying your tax bill.
• However, tax credits are not currently refundable, so if you owe less than $900 in this example, the difference can be used toward the next quarter’s tax bill.

Other things to keep in mind:

• Some businesses may qualify for a 30% Federal Grant instead of the tax credit. This is like cash. Home owners do not qualify. More info about grant qualifications here.
• Whether you’re a home or business, you can only claim the 30% Federal Investment Tax Credit for the year that your solar was “placed in service.” In other words, you should claim the tax credit for the 2010 tax year if your solar system was up and running in 2010. If you only put your deposit down in 2010, but the system was installed in February of 2011, then you need to claim the solar tax credit for 2011 tax purposes.

• Business may also qualify for other tax benefits, such as Modified Accelerated Cost-Recovery System (MACRS) + Bonus Depreciation (2008-2012). Under this program, federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. Currently under the MACRS, solar electric and solar thermal technologies, including solar hot water systems, are classified as having a 5 year life, allowing the recovery to be captured over a 5 year schedule.
• Don’t forget that you may qualify for city, state, or utility tax benefits too. The best resource to confirm these tax breaks in your state are at http://www.dsireusa.org/solar.

IRS Tax Forms for Solar and Energy Efficiency Tax Credits

• Here is the 2010 RS Form 5695 for residential systems. Submit it with your 2010 taxes (by April 15, 2010).
• On the 2010 1040 form, the residential energy tax credit (from Form 5695 above) is claimed on line 52.
• For businesses, the 2010 Form 3468 should have been available online January 27, 2011. Right now, only the 2009 version available, but keep checking back. The link above should be updated when the IRS finally posts the 2010 version.

We hope this information helps, however, please remember that we are not tax advisers, so always consult with your tax expert before applying the above.

Regardless of the tax breaks, we want to thank you for going solar. Please share this information with your friends and other businesses associates.