Federal Energy Investment Tax Credit and Grant Incentives for Solar Investments
Sharon Canavan, Community Relations Expert, OCC
The federal government offers energy investment tax credit and grant incentives
to encourage banks and other investors to finance solar energy installations.
Before banks invest, however, they should carefully examine the implications of
Section 48 of the Internal Revenue Code (IRC) authorizes the energy investment
tax credit (ITC) for “equipment which uses solar energy to generate
electricity.” Originally, the energy ITC provided a 10 percent tax credit, but
the tax credit was increased to 30 percent by the Energy Policy Act of 2005.
To promote the growth and stability of the solar industry, the Energy
Improvement and Extension Act of 2008 extended the energy ITC through December
30, 2016. The American Recovery and Reinvestment Act of 2009 further enhanced
the energy ITC by eliminating the requirement to reduce the amount to which the
energy ITC applied by the value of any subsidy received by a project.
The 30 percent energy ITC credit is calculated using the total cost of a solar
installation, including both equipment and labor—but excluding the building or
structural components on which the solar equipment is placed, such as a carport
or roof. The full value of the energy ITC is earned when the solar facility is
ready and available for its intended use (i.e., placed in service). For the
first five years, however, the tax credit is subject to recapture if either (1)
the property ceases to be a qualified energy facility or (2) a change in
ownership interest occurs. The rate of recapture of the tax benefit is 100
percent in the first year and declines by 20 percent each year thereafter until
the compliance period expires.
In 2008, as the economy slowed, demand for tax credit investments declined. The
Recovery and Reinvestment Act provided an alternative option to receive an
amount equal to the energy ITC as a direct cash grant payment from the U.S.
Department of the Treasury. Section 1603 grants are available for qualifying
properties placed in service during 2009, 2010, or 2011, for solar construction
projects that begin before December 31, 2011, and projects placed in service by
the end of 2016. Grant applications must be received by the Treasury Department
by September 30, 2012.
In 2009 and 2010, Section 1603 cash grant awards for solar projects totaled $416
million, representing 7.5 percent of the total awards granted. To date, the
energy ITC has supported 1,179 solar projects with total investments of over
While the cash grant program has proven to be popular with investors, banks
should evaluate other considerations before choosing that option. For example,
an investor’s corporate alternative minimum tax can be reduced by the amount of
the energy ITC, but not by the dollar value of the grant. In deals involving
tax exempt or “non-qualified” participants with any direct ownership
interest, the tax credit is the appropriate approach because these types of
participants are excluded from the cash grant program. The bank must evaluate
its projected taxable income. The full value of the energy ITC is earned
immediately when a project is placed in service, so the taxpayer’s ability to
absorb the entire amount of the energy ITC in the first year should be analyzed
(although unused tax credits can be carried forward for up to 20 years).
Therefore, the cash grant program may be more suitable for very large projects.
Also, the risk of a tax benefit’s recapture is lower under the cash grant
program. Cash grants are subject to recapture only if: (1) there is a change in
use of the facility in the first five years; (2) the project is shut down; or
(3) the project or a partnership interest is transferred to a governmental
agency or tax-exempt entity.
Another tax consideration for investments in solar equipment is the benefit from
the modified accelerated cost recovery system, which provides accelerated
depreciation over a five-year period, using the straight-line 20 percent
declining balance depreciation treatment under Section 168 of the IRC. Under
Section 50 of the IRC, however, the dollar amount of the project that can be
depreciated must be reduced by 50 percent of the energy ITC amount.10
Banks should consult their own tax planners for advice about these tax
provisions, and their applicability to specific transactions, as well as the
consequences that may apply to their own transactions.
For more information, see the OCC’s Community Developments Fact Sheet,
“Solar Energy Investment Tax Credits and Grants.”
9 Greentech Media,
December 17, 2010.
10 For a detailed analysis of
the interaction between the energy ITC and accelerated depreciation, see
Financing Non-Residential Photovoltaic Projects: Options and Implications,
Mark Bolinger, Lawrence Berkeley National Laboratory, January 2009, p. 6.
OCC's Community Affairs Department
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