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Federal Tax Credits Available for Solar and Energy Efficiency
Starting January 1, 2006
The Energy Policy Act of 2005 (EPAct 2005) provides new tax incentives for a number of solar & energy efficiency measures, including:
- Tax credits for residential and commercial solar photovoltaic and hot water heating systems
- Tax deductions for highly efficient commercial buildings
- Tax credits for highly-efficient new homes
- Tax credits for improvements to existing homes including high-efficiency air conditioners and equipment
- Tax credits for residential fuel cell systems
- Tax credits for fuel cell and microturbines used in a business
- Tax credits for fuel-efficient vehicles
What are Tax Credits and Tax Deductions?
There is an important difference between a tax deduction and a tax credit. A tax deduction is subtracted from income before total tax liability is computed. On the other hand, a tax credit is subtracted directly from the total tax liability. This means that a deduction and a credit have very different values, with a credit being 3 or more times more advantageous to the taxpayer than a deduction. For example, a tax credit of $1,000 for someone in the 28% tax bracket is equivalent to a tax deduction of $3,571.
Tax Credits for Solar Photovoltaics and Water Heating Systems
Federal tax credits are available for residential and commercial solar energy systems placed in service between January 1, 2006 and December 31, 2007.
Residential Tax Credits
For solar water heaters and solar electric (PV) systems, the tax credit is 30% of the equipment and installation cost, with a maximum tax credit of $2,000.
Commercial Tax Credits
For solar water heaters, solar electric (PV) systems, and solar hybrid lighting, the tax credit is 30% of the equipment and installation cost, with no maximum limit.
To be eligible for the solar hot water system tax credit, the system must be certified by the Solar Rating and Certification Corporation (SRCC) and produce 50% or more of the hot water needed by the residence. There is no qualification provided for PV systems. Individuals may claim tax credits for either or both types of solar systems.
Energy Efficient New Homes
This provision offers homebuilders a tax credit of $2,000 for homes that reduce energy use for heating and cooling only (not hot water) by 50% compared to the national model code — the 2004 IECC Supplement (assuming an SEER-13 air conditioner). Producers of manufactured homes can also choose to qualify for a tax credit of $1,000 for homes that save 30%. This $1,000 credit for reaching 30% savings is not available for site built homes, which must reach the 50% savings tier to qualify for the $2,000 credit.
Eligible homes must demonstrate savings using software that has been approved by DOE and builders must demonstrate compliance by the use of third-party inspectors certified according to DOE rules. While no interim rules have yet been promulgated to meet these requirements, similar standards exist in Florida and elsewhere under the auspices of Florida's Building Energy Rating System and under the national standards of the national Residential Energy Services Network (RESNET). Additionally, the Florida Solar Energy Center has released a free 60-day trial version of software that makes the calculations that are expected to be used for tax credit qualification. To download this free 60-day trial software, visit http://energygauge.com/USARes/trial.htm. The incentives apply to homes placed in service during 2006-2007, although extenders increasing the eligibility through 2009 are a possibility.
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