 Tax
credit for solar panels
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 Dear
Tax Talk;
Let's say I want to install solar panels to power my new home that
will have a build completion date either the end of 2006 or early
2007. What kind of tax credit will I be allowed?
-- Anthony
 Dear
Anthony;
Although I covered this recently, since then
the IRS has released Notice
2006-26 that provides interim guidance for the energy credit.
The Energy Policy Act of 2005, signed by President Bush on Aug.
8, 2005, offers consumers and businesses federal tax credits beginning
in January 2006 for purchasing fuel-efficient hybrid-electric vehicles
and energy-efficient appliances and products. Most of these tax
credits remain in effect through 2007. A tax credit is generally
more valuable than an equivalent tax deduction because a tax credit
reduces tax dollar for dollar while a deduction only reduces the
amount of income on which you are taxed. Although the law is six
months old, the IRS has still not addressed all the credits available.
I'm an accountant and not
an engineer, so it's kind of difficult to understand what types
of devices are referred to in the IRS notice. In addition, the notice
doesn't cover all the types of energy-saving components that are
eligible for a tax credit. Actually, the notice doesn't talk about
solar panels. Instead the notice addresses more interesting items
such as geothermal
heat pumps in an open and closed system. You can get up to a
$300 tax credit for installing a system.
Although the notice didn't
address solar panels, the press
release introducing the notice provided the following information
about solar panels:
The new law makes a credit available to those who
add qualified solar panels, solar water heating equipment or a
fuel cell power plant to their homes in the United States. In
general, a qualified fuel cell power plant converts a fuel into
electricity using electrochemical means, has an electricity-only
generation efficiency of more than 30 percent and generates at
least 0.5 kilowatts of electricity.
Taxpayers are allowed one credit equal to 30 percent
of the qualified investment in a solar panel up to a maximum credit
of $2,000, and another equivalent credit for investing in a solar
water heating system. No part of either system can be used to
heat a pool or hot tub.
Additionally, taxpayers are also allowed a 30 percent
tax credit for the purchase of qualified fuel cell power plants.
The credit may not exceed $500 for each 0.5 kilowatt of capacity.
With respect to the exclusion of pools and hot
tubs, it's my understanding that if the system includes electricity
or hot water to heat either, then the system would be ineligible
altogether. You can find more information on tax credits at energystar.gov,
and we'll try to keep you posted as more information becomes available.
To ask a question on Tax Talk, go to the "Ask
the Experts" page, and select "taxes" as the
topic.
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