Tax credits are fairly easy to administer compared with other financial incentives and may be more politically viable than cash payments because they do not require an annual appropriation. If tax credits are successful in expanding markets, they can ultimately result in a net gain in public revenue. One of the weaknesses often attributed to tax incentive policies is that entities without tax liability, such as government agencies, non-profits and schools, are not eligible for the incentive despite their increasing interest in utilizing solar technologies. In addition, system owners or investors with limited state tax burdens may not be able to take full advantage of state tax credits. In recent years, third-party system ownership combined with power-purchase agreements and other financing models have helped mitigate these obstacles.
Although state tax credits may not be the primary motivating factor influencing purchasing decisions, they may help “seal the deal”. This policy option can be especially helpful in states where public benefits funds or other direct funding sources are not available. A few states also offer small production tax credits for solar, though these credits are typically very modest and are not major drivers of solar development.
 A third-party business or investor installs and owns a solar system on a host customer’s property and sells the power produced by the system to the host customer for a set period. The third-party investor utilizes the tax credits and benefits available for the solar system (e.g. tax credits, rebates). These power-purchase agreements are often used by entities that cannot utilize the tax credits, entities that prefer not to own and maintain a system , or entities that lack financial capital to purchase equipment.
 Case Studies on the Effectiveness of State Financial Incentives for Renewable Energy, Susan Gouchoe, Valerie Everette, and Rusty Haynes (NC Solar Center). National Renewable Energy Laboratory, NREL/SR-620-32819. 2002.
|Incentive Type:||Corporate Tax Credit|
|Eligible Renewable/Other Technologies:||Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Landfill Gas, Wind, Biomass, Hydroelectric, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, Municipal Solid Waste, CHP/Cogeneration, Solar Hybrid Lighting, Hydrokinetic Power (i.e., Flowing Water), Anaerobic Digestion, Small Hydroelectric, Tidal Energy, Wave Energy, Ocean Thermal, Fuel Cells using Renewable Fuels, Microturbines, Geothermal Direct-Use|
|Applicable Sectors:||Commercial, Industrial, Utility, Agricultural|
|Amount:||30% for solar, fuel cells, small wind and PTC-eligible technologies;*
10% for geothermal, microturbines and CHP*
|Maximum Incentive:||Fuel cells: $1,500 per 0.5 kW
Microturbines: $200 per kW
Small wind turbines placed in service 10/4/08 – 12/31/08: $4,000
Small wind turbines placed in service after 12/31/08: no limit
All other eligible technologies: no limit
|Eligible System Size:||Small wind turbines: 100 kW or less (except unlimited for PTC-eligible wind)*
Fuel cells: 0.5 kW or greater
Microturbines: 2 MW or less
CHP: 50 MW or less*
Marine and Hydrokinetic: 150 kW or greater (as defined by PTC eligibility)
|Equipment Requirements:||Fuel cells, microturbines and CHP systems must meet specific energy-efficiency criteria|
|Authority 1:||26 USC § 48|
|Authority 2:||Instructions for IRS Form 3468|
|Authority 3:||IRS Form 3468|
Note: The American Recovery and Reinvestment Act of 2009 allows taxpayers eligible for the federal renewable electricity production tax credit (PTC)* to take the federal business energy investment tax credit (ITC) instead of taking the PTC for new installations. The eligible technologies listed above reflect this allowance in that they include PTC-eligible technologies/resources such as landfill gas and wave power that are now eligible for the ITC. Please see the DSIRE PTC summary for further information regarding eligibility.
The federal business energy investment tax credit available under 26 USC § 48 was expanded significantly by the Energy Improvement and Extension Act of 2008 (H.R. 1424), enacted in October 2008. This law extended the duration — by eight years — of the existing credits for solar energy, fuel cells and microturbines; increased the credit amount for fuel cells; established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems; allowed utilities to use the credits; and allowed taxpayers to take the credit against the alternative minimum tax (AMT), subject to certain limitations. The credit was further expanded by the American Recovery and Reinvestment Act of 2009, enacted in February 2009.
In general, credits are available for eligible systems placed in service on or before December 31, 2016:
- Solar. The credit is equal to 30% of expenditures, with no maximum credit. Eligible solar energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible. Passive solar systems and solar pool-heating systems are not eligible.
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