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BERKELEY, California, US, April 5, 2006
(Refocus Weekly)
The economic value of new U.S. tax credits for
solar photovoltaic systems is not straightforward and depends on a
variety of factors, according to an analysis by a federal
laboratory.
Since the start of 2006, the Energy Policy Act of 2005 has
implemented a new 30% residential tax credit for solar PV and has
increased the existing 10% tax credit for commercial PV
installations to 30%, notes the Lawrence Berkeley National
Laboratory in a report prepared with the Clean Energy States
Alliance. Using a financial model to equate the net present value of
after-tax cash flows under both pre- and post-EPAct conditions, it
finds that the residential PV tax credit is worth as much as US$2
per watt for small residential systems under 1 kW capacity, but that
value declines “precipitously” to 50¢ per watt as system size
increases to 4 kW.
The decline is due to the fact that the residential credit is capped
at $2,000 but, since the commercial credit is not capped, system
size is less relevant and EPAct's incremental commercial credit
provides $2 of value to commercial systems regardless of their size,
explain authors Mark Bolinger and Ryan Wiser of the Berkeley Lab and
lawyer Edwin Ing in ‘Exploring the Economic Value of EPAct 2005's PV
Tax Credits.’ The benefit will also vary depending on whether the
grant from a state or utility is a taxable or non-taxable benefit,
and the tax status of the system owner since tax-exempt owners
cannot benefit from tax credits.
The U.S. tax department (IRS) may consider grant to be taxable
income because, “at least for the foreseeable future, most PV
systems in the US are likely to be installed with the financial
support of a state or utility PV program,” they note. “If the grants
provided by these programs are considered to be taxable income, then
a grant recipient can claim the federal PV tax credit (and
depreciation benefits, if a commercial system) on the full cost or
‘basis’ of the system. If, however, the grants are not considered to
be taxable income, then the grant recipient must reduce, by the
amount of the grant, the basis to which the federal credits (and
depreciation) apply.”
A non-taxable grant that reduces up-front system costs by 50% will
also reduce by half the value of the federal tax credits and the tax
benefits of depreciation for commercial systems. Few state or
utility PV programs have reduced the size of their grants to account
for the extra value provided by EPAct's tax credits and, for those
few that have taken action, “have not reduced grant size to the full
extent possible, thereby leaving system owners better off than they
were prior to EPAct, even despite a lower rebate level.”
“The market for grid-connected photovoltaics in the U.S. has grown
dramatically in recent years, driven in large part by PV grant or
‘buy-down’ programs in California, New Jersey and many other
states,” it explains. “The recent announcement of a new 11-year $3.2
billion PV program in California suggests that state policy will
continue to drive even faster growth over the next decade.”
“With the signing of EPAct on August 8, the federal government is
poised to play a much more significant future role in supporting
both commercial and residential PV systems,” but the report cautions
that, “given the degree of economic impact at stake, whether or not
PV grants are taxable is clearly an important question.” The IRS has
provided no direct guidance on the issue, and broadly considers
government grants as taxable income unless statutorily excluded from
taxation.
The authors noted that the interpretation suggests that PV grants
should be considered taxable income, but they could be excluded if
they were found to be a government social welfare payment, a
manufacturer or dealer rebate, a contribution to the capital of a
company or, the most likely option, a utility energy conservation
subsidy. The findings have “important implications” for policy
design and the type of incentive offered, since many PV programs
(including California’s solar initiative) are considering shifting
from capacity-based incentives ($/W grants) to performance-based
incentives ($/kWh over time) “based on the belief that
capacity-based incentives reduce the project’s basis to which
federal tax credits and depreciation apply, making them less
valuable than performance-based incentives, which do not reduce
basis.”
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