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Advantages and Disadvantages of Residential Photovoltaic Solar PowerThe use of a photovoltaic system to convert sunlight into electricity by the attachment of solar panels on a residence or residential property has many advantages. First, sunlight is produced free of charge, although not on a predictable basis (particularly in northern climates, as in Michigan). Nonetheless, solar energy production occurs during the daylight hours—the time of peak energy demand. Solar power not used by a particular residence can be cheaply and quickly transferred into the power grid through local interconnection devices that limit the need for huge capital expenditures for energy transmission to end users. Localized solar power has an advantage over commercial wind power in ease of power transmission to the end user.One of the less attractive aspects of residential solar power is the requirement with most residential systems that a homeowner remain on the utility's electricity grid. This makes stand-alone capability highly unlikely in many areas of the United States. In addition, the installation of solar panels on a residence requires a personal capital expenditure rather than an expenditure funded by the government or a public utility. Finally, although the installation of solar panels may add to a home's value, it also adds to a home's maintenance and repair costs, complicates roof repairs, and increases insurance costs. When the benefits and burdens are weighed, however, residential use of solar panels to produce electricity provides a net benefit both to the homeowner and to the utility. Encouraging solar panel use will reduce reliance on fossil fuels as an energy source.
The Federal Residential Energy Efficient Property Tax CreditIn 2008, Congress enacted multiple legislative acts comprehensively called the Emergency Economic Stabilization—Energy Improvement and Extension—Tax Extenders and Alternative Minimum Tax Relief Acts of 2008 (2008 Economic Stabilization Act), Pub. L. No. 110-343, 122 Stat. 3765. An act called the Energy Improvement and Extension Act of 2008 (2008 Energy Act), enacted on October 3, 2008, forms division B of the 2008 Economic Stabilization Act.The major component of the 2008 Energy Act, as it relates to solar power, is the long-term extension and beneficial modification of the Residential Energy Efficient Property Tax Credit (REEP). 2008 Energy Act § 106. The REEP was scheduled to expire at the end of 2008, but the 2008 Energy Act extended the REEP credit through the end of calendar year 2016. The 2008 Energy Act also removed the cap on the available credit and expanded the REEP. Before the 2008 Energy Act, an individual homeowner was allowed an annual credit for the purchase of "residential energy efficient property" equal to the sum of 30% of the amount paid for a "qualified solar energy property," with a maximum credit of only $2,000. See Internal Revenue Code § 25D(b)(1). For tax years beginning after December 31, 2008, the 2008 Energy Act removes the $2,000 limitation on the credit allowed in a tax year for "qualified solar electric property expenditures." Now the 30% credit is unlimited. Id. The elimination of the cap on the credit for "qualified solar electric property" in the 2008 Energy Act provides one of the largest incentives for the addition of qualified solar energy property to a residence. In 2009, the ARRA also extended the 30% credit to all eligible technologies (except fuel cells) placed in service after 2008.Before the 2008 Energy Act, a family that spent $40,000 on qualified solar electric property improvements received only a $2,000 credit against its federal income tax liability. Now, with the cap on the annual limit lifted, that same family can obtain a credit in the amount of $12,000 against their tax bill, based on a $40,000 expenditure. This is a tax credit and not a deduction. A deduction of $12,000 would lower taxable income by $12,000 and produce tax savings of only $3,360 at the 28% bracket. In contrast, a $12,000 credit is a dollar-for-dollar credit against the tax a homeowner would otherwise pay and is nearly four times more valuable.What expenses qualify for the federal REEP credit? IRC § 25D(d)(2) defines the term "Qualified Solar Electric Property Expenditure" as "an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer." IRC § 25. The term "Qualified Solar Electric Property Expenditures" also includes costs incurred for solar panels and other property installed as a roof or a portion of a roof. This includes the acquisition of solar panels used in photovoltaic systems. Further, IRC § 25D(e)(1) defines "Qualified Solar Electric Property" as labor costs properly allocable to on-site preparation, assembly, or original installation of the panels on the property and for the piping or wiring used to connect the property to the home.It is also noteworthy that for the purposes of this particular tax incentive, the residence does not have to be a primary residence. Qualifying improvements can be made to a vacation home and other dwelling units such as mobile homes, manufactured homes, and even certain houseboats. IRC § 25D(d)(2) (qualified solar electric property expenditures may be made on any dwelling unit used as a "residence"). In contrast, IRC § 25D(d)(3), related to "Qualified Fuel Cell Property Expenditures," contains more limited language allowing the fuel cell credit only for a dwelling unit used as a "principal residence." Clearly, Congress intended the Solar Energy Tax Credits for solar property expenses to apply more expansively than the credits for fuel cell expenditures. There are even specific IRC sections permitting the pro rata allocation of REEP credits to owners of cooperative housing corporations and condominium associations. See IRC § 25D(e)(5) (cooperatives) and IRC § 25D(e)(6) (condominiums). The 2008 Energy Act also eliminated the provision that previously denied the credit to owners of property purchased or financed by subsidized energy financing. See IRC § 48(a)(4)(C). Even if the government creates a financing program for residential solar panels, the REEP credit should be available.If a taxpayer claims the REEP credit, the taxpayer is required to reduce the basis of the home by the amount of the tax credits allowed. This is presumably designed to subject a homeowner to potential tax in the future to offset the immediate tax benefits received. Reducing the basis of a primary residence does not have a negative effect, however, because currently the IRC does not provide for recapture if one sells a primary residence and fits within the exclusion of gain on the sale of a principal residence under IRC § 121. The sale of second homes and vacation properties could be negatively affected by the reduction in basis because IRC § 121 excludes recognition of gain only on the sale of qualified personal residences, not on the sale of second homes.Residential energy tax credits should be claimed on IRS Form 5695. On the tax form, a homeowner also can claim federal tax credits for other qualified energy-efficient improvements such as insulation, exterior windows (including certain storm windows and skylights), exterior doors (including certain storm doors), certain qualified metal roofs designed to reduce heat gain of a home, and certain efficient heat pumps, water heaters, air conditioners, furnaces, and fans. Also, if the taxpayer's solar powered system is designed to heat the water in the home in the permitted manner, the taxpayer can receive a qualified solar water heating property tax credit.
The Interplay of State and Local Tax Credits Related to Solar Power and Renewable Energy SourcesState legislatures have taken several different approaches to encourage investment in environmentally friendly improvements. The following discussion analyzes several of these approaches, focusing on the tax benefits to a hypothetical family of two adults and two children with a combined household income of $120,000. The hypothetical assumes that the family's marginal federal income tax rate is 28% and they own a primary residence worth $300,000, subject to a mortgage balance of $180,000. The family desires to add solar panels or structures containing solar panels at a cost of $40,000. The proposed solar panel system would contain a surface area of approximately 300 square feet of solar panels and would generate three kilowatts of power. A system of this size would likely supplement power generated from other sources and would still require connection to a power grid, but could produce 50% to 75% of a family's power needs.
solar energy collectors; storage tanks and other storage systems, excluding swimming pools used as storage tanks; rockbeds; thermostats and other control devices; heat exchange devices; pumps and fans; roof ponds; freestanding thermal containers; pipes, ducts, refrigerant handling systems, and other equipment used to interconnect such systems [however, conventional backup systems of any type are not included in this definition]; windmills; wind-driven generators; power conditioning and storage devices that use wind energy to generate electricity or mechanical forms of energy; pipes and other equipment used to transmit hot geothermal water to a dwelling or structure from a geothermal deposit.Fla. Stat. § 196.012(14).In addition to the Florida incentives to homeowners for the production of energy from solar power and the property tax exemption, the state also exempts the purchase of a "solar energy system" from Florida's 6% sales tax. Id. § 212.08. This sales tax exemption covers the equipment and hardware used for collecting, transferring, converting, storing, or using incidental solar energy for water heating, space heating and cooling, or other applications. On a $40,000 purchase, this sales tax exemption would result in an additional $2,400 saving.The City of Tallahassee Utility System also offers loans direct to consumers to acquire energy-saving measures, including photovoltaic systems and solar water heating systems. Under the program, a homeowner can borrow up to $20,000 directly from the city for a photovoltaic system at a 5% interest rate. Although these loans do not cover the entire cost of the photovoltaic system, both the rate and amount of these loans show that the city is serious about promoting the acquisition of solar energy systems for homeowners.In summary, the state of Florida, likely because of its warmer weather and higher use of air-conditioning, has one of the most progressive state-funded incentives for the production and use of solar power in personal residences.
Other Potential Financing Sources and Alternatives to Tax CreditsHome EquityBecause many qualified solar energy improvements are actually improvements to homes or to real property, the likelihood is high that homeowners will be able to obtain home equity financing or other qualified financing secured by the value of the improvements. The separate structure proposed in this article is similar to a garage, shed, or other home improvement that adds value to a home and would qualify the taxpayer for deductible interest as qualified home equity indebtedness, under IRC § 163(h)(3)(A)(ii).
ConclusionThe use of residential solar power appears to be a "win-win" for homeowners, utility companies, and the environment. As improvements continue to be made to photovoltaic panels, heating systems, transmission systems, and storage systems, the use of solar power by homeowners should increase even in areas without optimal sunshine. The tax incentive programs should result in greater sales of equipment relating to the production of solar energy and, in turn, result in more improvements and less cost per unit, not unlike that experienced for computers and other electronic equipment. Return To Issue Index