I happen to be a New York Giants fan; last year they won the Super Bowl, seemingly out of nowhere. Unfortunately, as a practicing tax CPA I spend more time watching Congress than the NFL and most of the sudden changes there turn out to be rather unpleasant.
So it was another wonderful surprise when Congress included major improvements to Solar Photovoltaic Tax credits as part of their second ultimately successful attempt to pass the $700 billion bailout package in early October. It’s not often that I applaud Congress but these credits are smart: they encourage capital investment, they stimulate the economy and, since they lower our reliance on fossil fuels, they’re good for the environment and help with our trade imbalance. As a socially conscious businessman, this makes me happy.
So what exactly changed? These solar credits have actually been available for a while, but they were so limited that for most taxpayers it was almost pointless to bother with them. Now, starting in 2009 taxpayers can get an unlimited 30 percent federal tax credit for every dollar of photovoltaic panels and inverters they install in their home or business.
Credits like these are applied as if they were payments you made against your tax liability. For example, if you were going to owe $6,000 in federal tax on your 2009 return, but instead installed a qualified $20,000 system, you would generate $6,000 in credits that would completely offset your tax liability. Not a bad deal, huh?
Perhaps more importantly, credits can now be applied against the Alternative Minimum Tax (AMT). Congress seems to create a lot of feel-good legislation that doesn’t really fix anything. In the tax arena they pass lots of nice credits but always limit them by not allowing their application against the dreaded AMT. Explaining AMT would take this entire column; let’s just illustrate the change using the previous example: if your AMT tax was $4,500, under the old rules you would only have been able to use $1,500 of your $6,000 credit. So this is another great change.
In addition to the federal changes, we’re very fortunate to live in Hawaii. First off, we’ve got plenty of sun. Plus, the state offers a 35 percent tax credit. That means next year, federal and state credits combined will pay for a whopping 65 percent of the cost of your photovoltaic system.
Is there any bad news? Well, a little. Where before it was the fed’s $2,000 homeowner and AMT limitations that restricted the benefits of these credits, now it’s the state’s turn. While Hawaii has a generous $500,000 business limit, it restricts homeowners to just $5,000 annually. And the state has an even more miserly and pointless $350 multi-family limit (think apartments and condos).
Even among Maui’s wealthiest residents, there aren’t many people who can use $500,000 in credits annually. For reasons too complicated to explain here but created by the passive activity limitations in the tax code, it’s very difficult for anyone but a large corporation to take advantage of that limit. Now that the feds have acted, our state legislature should consider changes this session. Since they’re short on tax money, I hope they’ll consider lowering the annual limit for businesses to, say, $200,000 and using the savings to increase the annual limits on homeowners and multi-family units. (Nothing’s in the works at the moment; don’t hold your breath.)
So if you decide to install a system, how much electricity will you save? In general terms, approximately 6.5 percent of the total system cost will be returned annually in electricity. Since the system will only cost you 35 percent of the total, the actual return on your investment is more than 18.5 percent annually. Plus the annual return is inflation protected since as oil goes up, so does your savings. This inflation adjusted return on investment is much better than any savings account, especially since it’s after-tax savings. That’s because you get taxed on that paltry 2 percent earnings on your savings, but not on saving electricity.
OK, where do you start. First, talk to a few of the established solar companies on Maui. They’ll explain net metering and the technical aspects of the equipment, and size up your roof or yard for an install. Start early, since there’s already a shortage of solar panels and it’s only going to get worse as the impact of these credits is felt. It’s also really important to have a chat with your tax advisor before you start to avoid making an expensive mistake.
However, as an excellent starting guide for a homeowner I’d recommend an annual installation starting in 2009 of $14,285.71, inclusive of GET. This is the Hawaii state credit limit of $5,000 divided by 35 percent. Any dollar you spend over this will still generate the 30 percent federal credit but you won’t get the state’s help anymore. So if your roof has room for a $60,000 system, plan on doing it over four or more years. Then sit back and let the sunshine in. MTW