The federal government encourages solar electricity by providing the following incentives:

• 30% Energy Investment Tax Credit  

• 5 year Accelerated Depreciation

Energy Investment Tax Credit for Businesses

Overview

• A 30% federal investment tax credit is provided for all solar equipment installed from January 1, 2006 through December 31, 2008. 

• For equipment installed on or after January 1, 2009, the tax credit for solar energy property reverts to 10%.  

• Carryback / Carryforward Provisions

  • A commercial solar tax credit that a taxpayer cannot use can be carried back one year. If there is still an unused credit, then the credit can be carried forward 20 years.

Background / Authority 

• The federal Energy Policy Act of 2005 (H.R. 6) expanded the federal business energy tax credit for solar installed in 2006 and 2007. These provisions of the tax credit were later extended through December 31, 2008, by Section 207 of the Tax Relief and Health Care Act of 2006 (H.R. 6111).

• Business energy credits are claimed by attaching Form 3468 to one's tax return.

  • http://www.irs.gov/pub/irs-pdf/f3468.pdf

• General Business credits are claimed by attached Form 3800.

  • http://www.irs.gov/pub/irs-pdf/f3800.pdf 

• Authority:  Section 48(a)(3) (Investment Credit: Energy Credit) of the IRS tax code.

Accelerated Depreciation

• For solar property placed in service after 1986, the current Modified Accelerated Cost-Recovery System (MACRS) property class is five years.

• For more information, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form 4562. The IRS web site provides a search mechanism for forms and publications. Enter the relevant form, publication name or number, and click "GO" to receive the requested form or publication.

• The depreciation schedule is:

Depreciation Basis Calculation:

For the purpose of calculating depreciation on a commercial solar system, the "tax depreciation basis" is a distinct value – separate from the tax credit basis. The tax depreciation basis that the taxpayer claims for the solar equipment must be reduced by 50% of the tax credit.

Formula:

Tax Depreciation Basis = System cost – (50% x 30% x System Cost)
Or
Tax Depreciation Basis = 85% x System cost

For more information, see:

• IRS Publication 946 (http://www.irs.gov/pub/irs-pdf/p946.pdf),
• IRS Form 4562: Depreciation and Amortization (http://www.irs.gov/pub/irs-pdf/f4562.pdf) , and
• Instructions for Form 4562 (http://www.irs.gov/pub/irs-pdf/i4562.pdf).