I’d say one of the most common questions I’ve had so far is this one… Is the 30% federal tax credit calculated from the Total System Cost or the Total System Cost minus the Utility Rebate?
If you browse through the thousands of different solar sites online, you will find a ton of information supporting both answers to this question…
The fact of the matter is that it is still not 100% certain. As of the time I’m writing this, the latest IRS forms have not even been published yet for 2009, as the uncapped version of this incentive is so new. Let me first explain the simple version, which is how this works from a Commercial standpoint. For these commercial installations, the utility rebate must be reported as taxable income by the recipient. So, when calculating the federal tax credit, the entire cost of the solar electric system is the final number used.
Here’s why… The utility company, at least in Arizona, is not actually subsidizing, per se, the overall cost of your system. If you read the fine print, you’ll see that they are, however, purchasing “environmental credits”. For each kilowatt-hour (kWh) of electricity produced by your photovoltaic (PV) system, there is an environmental credit involved. When the utility company pays you a certain dollar amount per rated Watt of solar you’ve installed, you are transferring them title and ownership of these credits. None of that really matters, except for the fact that there is a sort of “sale” going on…(the reasoning behind the environmental credits is another topic all together). They are not just reducing the overall cost of your PV system, they are buying something from you. And just as with any purchase, when someone buys something from you, that money is part of your income and you must report it as such for tax reasons.
And that is exactly what happens for all commercial installations. But, Section 136 of the U.S. Code (click here for more info) says that there is a personal exemption associated with the utility rebate. In other words, this rebate is not claimed as part of your gross income. In this case, the utility rebate is treated like a reduction in purchase price, not a purchase. The value is taken off the top of the Total System Cost, and the 30% federal incentive is calculated from this new final price.
Now the question is whether it MUST be done this way or not. An FAQ published by the Solar Energy Industries Association (SEIA) (www.seia.org) makes it sound like it is USUALLY done this way, but that does not mean it necessarily MUST be done this way. Read on:
“A rebate received by a homeowner in a residential context usually does not have to be reported as income when the rebate is received from the local utility. A homeowner who does not report the rebate as income takes a “tax basis” in solar equipment equal to the net amount he paid.”
This phrasing makes it seem that a homeowner can just as well report the rebate as income and calculate the 30% federal tax credit from the Total System Cost before subtracting the utility rebate. So the final answer to this so commonally asked question is this: it seems the homeowner has the option of either way of calculating the 30% federal tax incentive, but at the end of the day…only the IRS form will tell us for sure.