The 411 on Renewable Energy Tax Credits
The renewable energy tax credits offered by both the federal and state taxing authorities are the cornerstone of the solar industry and its marketing programs. This tax incentive can subsidize up to 65 percent of the cost of both solar water heating and photovoltaic (PV) systems, making the decision to go green a virtual no brainer for most consumers.
It is imperative that taxpayers get a clear understanding of exactly how these tax credits work to avoid getting any surprises or disappointment after their returns are filed and the actual refunds don’t quite measure up to their expectations.
These are the basic premises:
• To utilize the tax credits, the taxpayer must incur income tax liability
• Federal — an unlimited 30 percent of cost; unused credits in that tax year are carried forward to future tax years
• State of Hawaii — 35 percent of cost, but limited to a $5,000 cap per qualified PV system; $2,250 cap per solar water heater; unused credits carry forward to future tax years
• If a taxpayer has little or no tax liability on the Hawaii tax return (income consists of non-taxable pensions), a 24.5 percent tax rebate can be elected in lieu of the 35 percent tax credit
In calculating the applicable tax credit, the following assumptions are made:
1) A 30-panel PV system, qualifying as “three systems,” amounts to $45,000 gross price.
2) For federal credit, $45,000 is multiplied by .30 for a total of $13,500.
3) The federal gross tax liability is $15,000.
4) For federal net tax liability, $13,500 is subtracted from $15,000, totaling $1,500.
5) No credits to carry forward.
6) The total income tax withheld is $16,000.
7) For the tax refund, $1,500 is subtracted from $16,000, totaling $14,500 ($13,500 attributed to tax credit).
The same procedure applies to calculating the Hawaii credit:
1) For state credit, $45,000 is multiplied by .35, totaling $15,750 but limited to the $15,000 cap.
2) The state gross tax liability is $8,000.
3) For the state net tax liability, $8,000 is subtracted from $8,000, totaling 0.
4) The credit to be carried forward is $15,000 minus $8,000, totaling $7,000.
5) Total income tax withheld is $7,500.
6) For the tax refund, nothing is subtracted from $7,500. Is $500 “missing?”
In this scenario, several contradictions may appear to have occurred. The $28,500 of tax credits is only 63.33 percent of the purchase price, not the often-quoted 65 percent. This lies with the Hawaii $5,000 per system cap.
The total refund attributed to the energy credits is a combined $21,000 ($13,500 + $7,500), not the anticipated $28,500. This occurs because $7,000 will be carried forward on the state return.
Finally, what happened to the “missing” $500 of the state credit? The credit applied is $8,000, but the refund is only $7,500. The answer is nothing. That amount was never paid to the state as either tax withholding, estimated tax payments or past tax refunds applied to the following year. While the net tax liability was reduced to zero ($8,000 -$8,000), the total taxes actually withheld was $7,500.
While the renewable energy credits are an integral part of the decision to “go solar,” consumers must be wary of companies that overemphasize that part of the equation. Some have gone so far as to illustrate 33 panels as “five systems” for the Hawaii tax credit, whereas “three systems” are more likely to be accepted. But, it’s up to the taxpayer to make the claim, not the solar company. In the event that the tax department challenges the claim, the consumer will be the one to “take the hit” in an adverse ruling. There have already been reports of a “crackdown” by the tax department in this regard.
For information on designing efficient and economical solar systems, call Hi-Power Solar at 342-0802.