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On-Site Renewables Tax Incentives

Solar Energy Systems - Small Wind Systems - Geothermal Heat Pumps

Solar Energy Systems

What are the tax incentives for solar systems?

Businesses are eligible for tax credits for qualified solar water heating and photovoltaic systems, and for certain solar lighting systems. Qualifying equipment will either use solar energy to generate electricity, to heat/cool or provide hot water to a structure, or will use solar energy to illuminate the inside of a building by means of fiber-optic distributed sunlight (tube systems and passive solar are not eligible). The credits are available for systems "placed in service" between January 1, 2006 and December 31, 2016.

Homeowners are eligible for tax credits for qualified solar water heating and photovoltaic systems. Solar water heating systems produce hot water, photovoltaic systems produce electricity (including solar fans). The credits are available for systems "placed in service" at any dwelling unit, not necessarily the primary residence, between January 1, 2006 and December 31, 2016.

Note: This is a basic guide to the credit. For more detailed information, go to www.seia.org and download the Guide to Federal Tax Incentives for Solar Energy, or SEIA's FAQs regarding the new legislation.

Who is eligible for the tax incentives?

The tax credits go to businesses that install solar equipment for their use, and to individuals who install qualifying systems on homes they use as a residence (unlike other consumer incentives, the dwelling does not have to be the taxpayer's primary residence - second homes are eligible, although rental properties are not).

In the case of cooperative apartment buildings owned by a corporation, SEIA states that "if the corporation spends money on installing qualified solar property, each shareholder is allowed to claim residential solar tax credits on his or her share of the spending."

In the case of condominiums, SEIA reports that when the condominium management association "spends money on installing qualified solar property, each member of the association can claim the residential solar tax credits on his or her share of that spending," so long as the management association qualifies as a homeowners' association under the law, and the majority of the units in the condominium are used as dwelling units.

Manufacturers of solar equipment may qualify for a separate investment tax credit.

How do the incentives work?

The tax credits are for 30% of the cost of the system. For systems installed before January 1st, 2009, the maximum credit for individuals is $2000 for photovoltaic systems and $2000 for solar water heating systems. Systems installed after December 31, 2008 are not subject to a cap. To qualify, residential systems must meet certain criteria as follows:

Alternative Minimum Tax and the Residential Solar Tax Credit

According to SEIA, the new legislation passed in October of 2008 "allows individual taxpayers to use the credit to offset AMT liability, and to carry unused credits forward to the next succeeding taxable year."

What do I have to do to qualify for these incentives?

To qualify, tax payers will need to have evidence regarding:

For taxpayers installing solar PV or water heating systems at their residence, use the Residential Energy Efficient Property Form 5695. For corporate taxpayers, use Form 3468 for Commercial Solar Incentives (Investment Credit).

Where can I learn more about qualifying products?

Good sources of information about these systems include:

Small Wind Systems

What are the tax incentives for on-site wind systems?

On October 3, 2008, the Emergency Economic Stabilization Act of 2008, H.R. 1424, was enacted into law and includes a new federal-level investment tax credit to help consumers purchase small wind turbines for home, farm, or business use. Owners of small wind systems with 100 kilowatts (kW) of capacity and less can receive a credit for 30% of the total installed cost of the system. The credit will be available for equipment installed through December 31, 2016. This legislation marks the first federal incentive for small wind systems since 1985. The incentive was further expanded through the American Recovery and Reinvestment Tax Act of 2009, which removed the financial cap that had been present in the 2008 legislation..

Who is eligible for the tax incentives?

Home-owners, farmers, and businesses that install wind turbines with not more than 100 kilowatts of nameplate capacity are eligible for the incentive.

Manufacturers of wind energy equipment may qualify for a separate investment tax credit.

What do I have to do to qualify for these incentives?

To qualify, tax payers will need to have evidence regarding:

Taxpayers installing on-site wind systems at their residence should use the IRS Residential Energy Efficient Property Form 5695. For businesses, use Form 3468 for small wind energy property.

For more information regarding on-site small wind systems:

Geothermal Heat Pumps

What are the tax incentives for geothermal heat pumps?

As part of the Emergency Economic Stabilization Act of 2008, an incentive was added for geothermal heat pump property. The incentive for businesses is available from Oct. 3, 2008 through December 31, 2016, and for residential installations the incentive is available for units placed in service starting January 1, 2008 until December 31, 2016. Qualified geothermal heat pump property refers to any equipment which uses the ground or ground water as a thermal energy source to heat the taxpayer's residence, or as a thermal energy sink to cool the residence. The unit must meet the requirements of the Energy Star program* which are in effect when the heat pump is purchased.

The residential incentive covers 30% of the expenditures in the year the incentive is taken, up to a cap of $2,000 if the property was installed prior to January 1, 2009. Qualifying geothermal heat pump property installed after December 31, 2008 is eligible for 30% of the installed cost without a cap, as provided under the American Recovery and Reinvestment Tax Act of 2009 (ARRA) . The incentive is available for taxpayers installing qualifying equipment at their primary residence or a second home, but not for a rental property.

Two options exist for the commercial incentive. An investment tax credit of 10% of the installed cost is available through 2016. The ARRA legislation also provides the option of taking a grant in lieu of the credit, worth 10% of the installed costs for equipment placed in service during 2009 and 2010.

Manufacturers of geothermal energy equipment may qualify for a separate investment tax credit.

What do I have to do to qualify for these incentives?

To qualify, tax payers will need to have evidence regarding:

Taxpayers installing geothermal heat pump systems at their residence should use IRS Form 5695 for the Residential Energy Efficient Property incentive. For businesses, use Form 3468 for geothermal heat pump systems.

For more information regarding geothermal heat-pump systems:

* Currently, the criteria for Energy Star geothermal heat pumps are: for a closed-loop system, 14.1 EER and a coefficient of performance (COP) of at least 3.3.  For an open-loop system, 16.2 EER and 3.6 COP.  For a direct expansion system, 15 EER and 3.5 COP.  In addition, the geothermal heat pumps must include a desuperheater, which helps heat water, or an integrated water heating system. 

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