I was at lunch today with my brother and we were talking about the potential law changes that are out there for residential energy credits. I decided to research a little more about it and post for those of you that may be interested. The bill that is of interest is HR 5351. It was passed by the House on February 27, 2008, and now sits with the Senate. The bill is part of the Renewable Energy and Energy Conservation Tax Act of 2008. Basically, under the new law, you would get a $4,000 credit for installing solar electric property and a separate $4,000 credit for installing wind energy property on residential (dwelling) units located in the United States and used as a residence by the taxpayer. If you want more detail, keep reading...
Present Law: Code section 25D (of the Internal Revenue Code) provides a personal tax credit for the purchase of qualified solar electric property. The credit is equal to 30% of “qualifying” expenditures, with a maximum credit of $2,000. Just to clarify, this is a Federal initiative…meaning that you would take the credit on your personal 1040. Your resident state may have additional credits that you would qualify for and that you would claim on that state’s individual tax return. Anyway, “qualified” solar electric property is property that uses solar energy to generate electricity for use in a dwelling unit. The credit is non-refundable…meaning that if you owed tax of $1,500 and you had an energy credit of $2,000, you could reduce your tax to $0 but you would not receive a refund of the $500…and as far as I understand, you cannot carry forward the excess credit to future taxable years. Based on current law, expenditures over $6,666 will result in excess credits (over the $2,000 amount) that would be lost. Although a refundable tax credit (i.e., child tax credit) would be nice, having a credit at all is better than nothing. By the way, the credit under the present law applies to property placed in service prior to January 1, 2009.
For depreciation purposes, the basis of the qualified solar electric property that you buy is reduced by the amount of the credit that you take. For example, assume it costs you $10,000 to buy and install (labor costs to install the equipment are “qualifying” expenditures eligible for the credit) a solar panel on your roof. Total costs come to $10,000. Your credit would be calculated as 30% x $10,000 = $3,000…but it would be limited to $2,000. That $2,000 credit would offset the total cost of $10,000; resulting in a depreciable basis of $8,000…meaning that if you were allowed to take depreciation deductions on that solar property, your basis for doing so would be $8,000. Note: you cannot depreciate assets for personal use but you can depreciate assets used in a trade or business…like a rental property.
Proposed Law: The proposed law extends the energy credit for six years (through December 31, 2014) and allows the credit to be claimed against AMT. The credit limit for solar electric property is also increased from $2,000 to $4,000. Based on the proposed law, expenditures over $13,333 will result in excess credits (over the $4,000 amount) that would be lost.
The proposed law also provides a new 30% credit for qualified small wind energy property expenses made by a taxpayer during the taxable year…with the total credit being capped at $4,000. Qualified small wind energy property expenditures are amounts paid for property that uses a wind turbine to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer. The credit would be allowed for qualifying expenditures after December 31, 2007 and for property placed in service prior to January 1, 2015.