The following tables provide an overview of the Federal income tax treatment of solar energy systems in California. This information should be useful to taxpayers who operate, install, maintain, or purchase solar energy systems in the state.
Solar Energy Credits
In 2015, the California legislature passed the Sustainable Energy Act (Chapter 548 of the Statutes of California, enacted in 2013). This law established the California Energy Efficiency and Solar Investment (“Solar Investment”) Program to provide a financial mechanism to foster solar power development in California. The act established a Solar Investment Tax Credit for businesses and individuals with an interest in solar energy. This credit reduces the taxable income of eligible taxpayers.
Eligible taxpayers may elect to take the credit on either a non-cash or income tax credit basis. A non-cash tax credit is applied to future income, while an income tax credit is applied to current income. The California tax agency provides a taxpayer’s guide to the credit, which should be helpful to taxpayers who are wondering how to claim the credit.
Income taxes are imposed on your taxable income, which is generally your gross income from all sources including, but not limited to, wages, salaries, dividends, interest, capital gains, and qualified property and business sales. Your taxable income for most taxpayers is determined by taking your taxable income and adding to it any itemized deductions (e.g., mortgage interest, medical expenses, charitable contributions, etc.). Your taxable income can vary depending on your filing status and whether or not you itemize your deductions. For more information on income taxes in California, consult your tax advisor or the IRS.
Generally, all income except certain business income and gains is taxable. Business income and gains are taxed at a lower rate (currently 10%). In addition, capital gains and qualified dividends are taxed at a lower rate (currently 10%). Finally, long-term capital gains are taxed at a rate of 20% instead of the usual 35% rate.
Non-cash Charitable Donation Deduction
If you make a qualified non-cash charitable donation of $511 or more during the year, you may be able to deduct the full amount of your contribution from your income. A qualified non-cash charitable donation means a donation that is not in cash, is not less than thirty days after the date it was made, and is made to a 501(c)(3) charitable organization. The IRS provides more information on charitable donations here.
If your total itemized deductions for the year exceed your taxable income for the year, you may be entitled to a refund or a tax credit based on your itemized deductions. Total itemized deductions for a taxpayer include all allowable deductions (e.g., mortgage interest payments, medical expenses, etc.) minus the standard deduction applicable to your income tax filing status. The standard deduction is, for most taxpayers, the smaller of (i) $12,200 (single); (ii) $24,400 (joint); or (iii) $32,600 (married, filing jointly).
Most taxpayers cannot itemize their deductions due to the limits of the standard deduction. For more information on itemized deductions, consult the IRS.
How to Claim the Credit
The following tables provide an overview of the Federal income tax treatment of solar energy systems in California. This information should be useful to taxpayers who operate, install, maintain, or purchase solar energy systems in the state. The income tax tables apply to an entity that operates, installs, maintains, or purchases a solar energy system in California (an “Eligible Entity”) in order to generate electricity for the purpose of selling any such electricity to a governmental entity or third party. In order to be an Eligible Entity, your organization (i) must be a for-profit organization (ii) must generate electricity (iii) for sale to a governmental entity or third party. Finally, your organization must not be classified as a “labor organization” and must not be operated in a tax-exempt manner.
In the case of an income tax credit, the credit is applied to your income tax due for the year prior (i.e., 2015 in this case). In the case of a non-cash charitable donation deduction, the $511 deduction applies to your income tax due for the year in which the donation is made.