TAX NEWS - 2010

Phoenix Tax: Solar industry gets guidance on tax credit

Utility incentives for solar can be considered taxable, but an IRS ruling could save customers more money on residential installations.

American Solar Electric received guidance on a tax credit question the industry has struggled with for nearly two years. While the IRS letter only applies to the customer who requested the ruling, it gives some direction.

The IRS affirms incentives from companies like Arizona Public Service Co. and Salt River Project are taxable, but alters how federal tax credit can be filed, which could save customers a little money,

"We were looking for guidance, something to tell folks what the IRS thinks," said Marc Schultz, a tax attorney with Snell & Wilmer LLP in Phoenix who worked with American Solar.

The challenge for installers who file with the IRS on behalf of customers is when to apply for the federal tax credit — a decision that can change a system cost by several thousand dollars.

"We're looking at tax credits that are $10,000 or better, and trying to figure out what we do with them," said Sean Seitz, president of American Solar.

Many solar installers had customers taking the tax credits based on the system price after the utility incentive was applied, reducing the price by one third.

The IRS ruling could shift that policy so the credit is based on the full price. Adding in the utility incentive would then boost the 30 percent tax credit from $6,000 to $9,000 on a $30,000 system. The added $3,000 could then offset taxes on the incentive.

The key to the ruling is that the utility incentive is not a true subsidy, but a stimulus for installing solar under a plan set up by the Arizona Corporation Commission, Schultz said.

Even with the IRS letter, there is a range of what solar companies may offer in terms of how they adjust the credit.

Lee Peterson, senior tax manager with the Reznick Group, a national accounting firm, said based on IRS rules he agrees the approach solar installers have been using, backing the utility incentive out of the system's cost before applying the tax credit, is the best approach.

"This is not debatable," he said. "A lot of people don't know this."

The nature of the tax credit and because there are different sources of the incentives in different states also make it difficult, Peterson said.

"You're seeing all kinds of things because you're got these moving parts," he said.

John Casey, CEO of GreenFuel Technologies in Phoenix, said it is an issue for residential systems, but his company opted early to use a more conservative approach.

"We did a lot of the same things," he said. "The IRS did come out with a ruling on how you calculate this," he said.