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Tax credits, depreciation, rebates, purchase options make sun viable alternative

Business use of solar energy continued to grow during 2010. A business that owns a building can update for solar by installing solar panels at or near the building and connecting them to the local utility.  The building would then receive electricity from both the solar panels and the utility.  Several financial incentives are available for businesses that want to go solar.  This article summarizes these incentives and describes the time frame for some of the incentives to expire or decrease.  This article also provides information on ownership and financing options.

Incentives

Federal tax credit or grant. The owner of a solar facility can claim a credit against its federal tax liability generally equal to 30 percent of the equipment and installation cost.  The tax credit is available for systems placed in service through 2016.  As a result of the 2009 federal stimulus, the owner of a commercial system has the option to receive, instead of the tax credit, a cash grant in the same amount.  The grant is not included in the owner’s gross income for federal or state income tax purposes. The Treasury Department is to pay the grant to taxpayers who have submitted a grant application within 60 days of the installation date.

In order to elect the grant, the owner must install the equipment or begin construction of the commercial solar facility no later than 2010. Unless Congress enacts legislation to continue the grant program, the grant option will not be available after 2010.

Depreciation. Commercial solar equipment and installation cost also qualifies for federal depreciation deductions over a five-and-a-half-year period.  If the owner claims the full 30 percent tax credit or grant, then approximately 85 percent of the equipment and installation cost is eligible for the deduction. California depreciation deductions over a longer period are also available. As an alternative, the taxpayer may elect to deduct the eligible cost as an expense, subject to the specific cost limitation for the taxable year during which the equipment is placed in service.

State rebate. The owner of a solar facility in PG&E’s territory can apply for a rebate through the California Solar Initiative. The amount of the rebate is calculated based on a formula that varies by system size, type of customer, payment level and payment method.

The payment level is determined when the customer submits a reservation for the rebate (system reservations in general can occur when an installation contract is signed).

Payment method is a function of system size.  Customers with solar facilities of less than 30kw receive a single rebate payment soon after installation based on the expected system performance.  Customers with solar facilities greater than 30kw receive the rebate as a monthly payment during a five-year period based on the actual energy produced by the solar facility. Performance-based monthly rebate payments to a PG&E commercial customer that is not a government or nonprofit entity and that submits a reservation at this time are currently $0.09 per kilowatt-hour.

Payment levels for customers that submit reservations in the future will decline in stages. The next decrease could occur at any time, depending on the number of reservations submitted and accepted.

Net metering.  PG&E will credit the customer for excess electricity that is generated by a solar facility and not used by the customer when produced.  If the system is properly sized, these credits can be used to offset the customer’s total electric bill.

The customer will also soon have the option to receive financial compensation from PG&E for credits that are received by the customer but not used within one year.

Ownership & financing options

Direct purchase.  If a property owner chooses to own the solar facility, this can offset—in the very short term due to the incentives listed above—a significant portion of the overall cost.  The balance of the system cost would be offset over a long-term period. Thus, many property owners will seek to finance at least a portion of the cost.

The Sonoma County Energy Independence Program is one option for property owners to obtain financing from the county of Sonoma for solar facilities at existing buildings through a voluntary assessment. For more information, go to www.sonomacountyenergy.org.

Power purchase agreement or lease.  If a property owner desires long-term predictable energy rates without owning the solar facility, then a Power Purchase Agreement or solar lease may be desirable.

Under a PPA or solar lease, the property owner agrees to purchase electricity for its property from a third party (usually a private-sector financing entity), which owns and installs a solar facility on the property. The primary benefits to a property owner of entering into a PPA or solar lease include very low up-front installation costs and no ongoing maintenance responsibility. Also, not all property owners can realize the benefits of direct ownership.

For example, government entities and not-for-profit corporations cannot receive the tax credit, the grant or the depreciation deduction.  Individuals and certain for-profit businesses may not be able to utilize fully the tax credit or the depreciation deduction.

These limitations are a function of the “at risk” and “passive loss” tax rules, as well as the fact that benefiting from tax credits and deductions requires having sufficient taxable income. Also, depending on the cost of the solar facility and the scope of the taxpayer’s expense elections for other property, the expense deduction alternative may not be desirable. Thus, PPAs and solar leases are of particular interest to property owners who are subject to these limitations.

Now is the time for property owners to take advantage of solar incentives, while they are still available at current levels.  Deciding between direct ownership one the one hand and a PPA or solar lease on the other, requires an analysis of circumstances that are specific to each property. Property owners should work with solar professionals and tax advisers to determine the most suitable and advantageous financing structure for the owner.

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Jason C. Vargelis is an attorney at the law firm of Carle, Mackie, Power & Ross LLP in Santa Rosa.  He practices in the area of real estate finance with an emphasis on tax credits and can be reached by phone at 707-526-4200 or by e-mail at jvargelis@cmprlaw.com.  This article is based on materials prepared by the author for Solar Sonoma County.  This article does not constitute legal or accounting advice. This article is not intended to describe incentive and financing considerations for solar installations of 1 MW or larger.

June 19 solar fair

For more information, attend the Second Annual Solar Energy & Efficiency Fair, "Make the Move to Clean Energy," presented by Solar Sonoma County and PG&E, Saturday, June 19,  11 a.m. to 5 p.m., Finley Community Center & Park, Santa Rosa, free admission, details at www.solarsonomacounty.org/eventssf.html.