Federal Tax Incentives

The Energy Policy Act of 2005 is the first effort of the US government to address energy policy since the Energy Policy Act of 1992. The 2005 law provided new tax incentives for a number of solar and energy efficiency measures. The incentives apply to buildings or renewable energy systems placed in service during 2006-2008 (following a 2006 extension).

There are two federal tax incentives available to commercial entities to encourage private investment in solar energy equipment and systems:

• an investment tax credit
• an accelerated depreciation allowance

Eligible buildings include commercial buildings such as offices, retail buildings, warehouses, etc., rental housing of four stories or more, and publicly-owned buildings.

New construction in an existing building is also eligible for the tax deduction, with one third of the deduction amount for new construction related to the new energy-using system (such as lighting or heating, cooling and water heating).

The accelerated depreciation schedule cannot be claimed for property used mainly outside the US, used by governmental units and foreign persons and entities, or property used by a tax-exempt organization (unless the property is used mainly in an unrelated trade or business).

Investment Tax Credit:

• Provisions of the bill increases the business investment tax credit from 10% to 30%. A further revision proposed for 2007 may change this to a Tax Credit of $1500 per one half Kilowatt installed.
• Available to businesses that purchase solar thermal and PV systems during 2006-2008 and a proposed extension thru 2012 in before the congress.
• Other provisions offer business taxpayers a deduction of $1.80 per square foot for commercial buildings that achieve a 50% reduction in annual energy cost
• Each of the energy-using systems of the building is eligible for one third of the incentive if it meets its share of the whole-building savings goal
• Explicit interim compliance procedures are provided for lighting

Accelerated Depreciation, Effective Jan. 1, 2006 to Dec 31, 2008:

• Any commercial entity that invests in or purchases qualified solar energy equipment may use a 5 Year (60 Month) accelerated depreciation schedule.
• Offers a 5-year accelerated depreciation option for certain new solar energy equipment and systems
• A Section 179 expense deduction may also be available but has limits.

Accelerated Depreciation, Jan 1, 2007 to Dec 31, 2012: (Proposed)

• Any commercial entity that invests in or purchases qualified solar energy equipment may use a 3 Year (36 Month) accelerated depreciation schedule.
• The accelerated depreciation option for certain new solar energy equipment and systems
• A Section 179 expense deduction may also be available but has limits.