BLOOMFIELD HILLS – During the summer of 2008, gas prices went through the roof, and the United States refocused on renewable energy. Americans say they desire energy independence from foreign nations and environmentally sound renewable energy sources.
To that end, the federal and state governments have enacted a number of alternative energy laws, including the Energy Improvement and Extension Act of 2008, Pub. L. No. 110-343, div. B, 122 Stat. 3807 (codified in scattered sections of 26 U.S.C.), which provides incentives for alternative energy sources in homes and businesses, and the American Recovery and Reinvestment Act of 2009 (ARRA) , Pub. L. No. 111-5, 123 Stat. 115, which promotes the development and use of renewable and alternative energy sources.
This article discusses the federal and state income and other tax credits available for various types of energy-efficient improvements, with a primary focus on tax credits available to residential homeowners using power generated by solar energy. To demonstrate the various ways states are providing tax incentives that are in addition to the federal tax incentives, this article compares tax benefits available to families located in Canton, Michigan, Tallahassee, Florida, and Raleigh, North Carolina. For example, some states provide tax rebates, some provide property tax credits for improvements, and others promote the use of utility companies to provide the incentives for the generation of alternative energy.
Advantages and Disadvantages of Residential Photovoltaic Solar Power
The use of a photovoltaic system to convert sunlight into electricity by the attachment of solar panels on a residence or residential property has many advantages. First, sunlight is produced free of charge, although not on a predictable basis (particularly in northern climates, as in Michigan). Nonetheless, solar energy production occurs during the daylight hours?the time of peak energy demand. Solar power not used by a particular residence can be cheaply and quickly transferred into the power grid through local interconnection devices that limit the need for huge capital expenditures for energy transmission to end users. Localized solar power has an advantage over commercial wind power in ease of power transmission to the end user.
One of the less attractive aspects of residential solar power is the requirement with most residential systems that a homeowner remain on the utility’s electricity grid. This makes stand-alone capability highly unlikely in many areas of the United States. In addition, the installation of solar panels on a residence requires a personal capital expenditure rather than an expenditure funded by the government or a public utility. Finally, although the installation of solar panels may add to a home’s value, it also adds to a home’s maintenance and repair costs, complicates roof repairs, and increases insurance costs. When the benefits and burdens are weighed, however, residential use of solar panels to produce electricity provides a net benefit both to the homeowner and to the utility. Encouraging solar panel use will reduce reliance on fossil fuels as an energy source.
The Federal Residential Energy Efficient Property Tax Credit
In 2008, Congress enacted multiple legislative acts comprehensively called the Emergency Economic Stabilization?Energy Improvement and Extension?Tax Extenders and Alternative Minimum Tax Relief Acts of 2008 (2008 Economic Stabilization Act), Pub. L. No. 110-343, 122 Stat. 3765. An act called the Energy Improvement and Extension Act of 2008 (2008 Energy Act), enacted on October 3, 2008, forms division B of the 2008 Economic Stabilization Act.
The major component of the 2008 Energy Act, as it relates to solar power, is the long-term extension and beneficial modification of the Residential Energy Efficient Property Tax Credit (REEP). 2008 Energy Act ? 106. The REEP was scheduled to expire at the end of 2008, but the 2008 Energy Act extended the REEP credit through the end of calendar year 2016. The 2008 Energy Act also removed the cap on the available credit and expanded the REEP. Before the 2008 Energy Act, an individual homeowner was allowed an annual credit for the purchase of “residential energy efficient property” equal to the sum of 30 percent of the amount paid for a “qualified solar energy property,” with a maximum credit of only $2,000. See Internal Revenue Code ? 25D(b)(1). For tax years beginning after December 31, 2008, the 2008 Energy Act removes the $2,000 limitation on the credit allowed in a tax year for “qualified solar electric property expenditures.” Now the 30 percent credit is unlimited. Id. The elimination of the cap on the credit for “qualified solar electric property” in the 2008 Energy Act provides one of the largest incentives for the addition of qualified solar energy property to a residence. In 2009, the ARRA also extended the 30 percent credit to all eligible technologies (except fuel cells) placed in service after 2008.
Before the 2008 Energy Act, a family that spent $40,000 on qualified solar electric property improvements received only a $2,000 credit against its federal income tax liability. Now, with the cap on the annual limit lifted, that same family can obtain a credit in the amount of $12,000 against their tax bill, based on a $40,000 expenditure. This is a tax credit and not a deduction. A deduction of $12,000 would lower taxable income by $12,000 and produce tax savings of only $3,360 at the 28% bracket. In contrast, a $12,000 credit is a dollar-for-dollar credit against the tax a homeowner would otherwise pay and is nearly four times more valuable.
What expenses qualify for the federal REEP credit? IRC ? 25D(d)(2) defines the term “Qualified Solar Electric Property Expenditure” as “an expenditure for property 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.” IRC ? 25. The term “Qualified Solar Electric Property Expenditures” also includes costs incurred for solar panels and other property installed as a roof or a portion of a roof. This includes the acquisition of solar panels used in photovoltaic systems. Further, IRC ? 25D(e)(1) defines “Qualified Solar Electric Property” as labor costs properly allocable to on-site preparation, assembly, or original installation of the panels on the property and for the piping or wiring used to connect the property to the home.
It is also noteworthy that for the purposes of this particular tax incentive, the residence does not have to be a primary residence. Qualifying improvements can be made to a vacation home and other dwelling units such as mobile homes, manufactured homes, and even certain houseboats. IRC ? 25D(d)(2) (qualified solar electric property expenditures may be made on any dwelling unit used as a “residence”). In contrast, IRC ? 25D(d)(3), related to “Qualified Fuel Cell Property Expenditures,” contains more limited language allowing the fuel cell credit only for a dwelling unit used as a “principal residence.” Clearly, Congress intended the Solar Energy Tax Credits for solar property expenses to apply more expansively than the credits for fuel cell expenditures. There are even specific IRC sections permitting the pro rata allocation of REEP credits to owners of cooperative housing corporations and condominium associations. See IRC ? 25D(e)(5) (cooperatives) and IRC ? 25D(e)(6) (condominiums). The 2008 Energy Act also eliminated the provision that previously denied the credit to owners of property purchased or financed by subsidized energy financing. See IRC ? 48(a)(4)(C). Even if the government creates a financing program for residential solar panels, the REEP credit should be available.
If a taxpayer claims the REEP credit, the taxpayer is required to reduce the basis of the home by the amount of the tax credits allowed. This is p
