Tax credits for green homebuilders and for renewable-energy installations expire at the end of 2008, so now is the time to invest in clean energy.

Deltec Homes, which specializes in circular abodes, recently installed 273 photovoltaic panels at its West Asheville facility through a partnership with Sundance Power Systems. photo courtesy of Deltec Homes

First, what is the difference between a tax credit and a tax deduction? A tax deduction is an amount you are able to “deduct” from your total income in order to decrease your tax liability, or the amount of tax you will owe the government. A tax credit is an amount of money that is subtracted from the amount of actual tax you owe after all of your deductions have been figured in. For example, if your annual income is $30,000, you are eligible for a $2,000 deduction, leaving you with $28,000 of taxable income. If you are taxed at 25 percent (rates vary), your tax due would be $7,000. Using the same numbers, if instead the $2,000 is a credit, you would have $30,000 of taxable income taxed at 25 percent and your tax due on this amount would be $7,500. Then you would apply the credit and owe only $5,500. The net difference is $1,500 in favor of the credit. Therefore a tax credit is much more valuable than a tax deduction.

What kinds of tax credits are available for renewable energy?

• Residential: The State of North Carolina offers a 35 percent tax credit of up to $1,400 for water heating, $3,500 for active- and passive-solar space heating and $10,500 for photovoltaic, wind and hydroelectric systems. The credit can be taken over five years. However, it cannot exceed 50 percent of the taxpayer’s liability. The federal government offers a 30 percent tax credit for solar equipment, up to $2,000.

For example, if you spend $4,000 on a solar hot-water heating system, you are eligible for a tax credit of $1,400 (subject to limits) from the state and a $1,200 tax credit from the federal government. You will have to pay some federal tax on the $1,400 state credit — approximately $350 if you are in the 25 percent tax bracket. Ultimately, this means purchasing a $4,000 solar water heater only costs $1,750 at the end of the day.

If you spend $10,000 on a one-kilowatt photovoltaic system, you are eligible for a tax credit of $3,500 (subject to limits) from the state and a $2,000 tax credit from the federal government. You will have to pay some federal tax on the $3,500 state credit — approximately $875 if you are in the 25 percent tax bracket. But in the end, purchasing the solar PV system would cost $5,375. This system would also generate $275 in electricity annually if sold to N.C. Green Power at $.21 per kilowatt-hour.

• Commercial: For commercial business properties, there is a $2.5 million limit on tax credits taken in North Carolina, and credits cannot exceed 50 percent of the taxpayer’s liability. There is no limit for the federal credit. The 35 percent N.C. tax credit can be applied to PV, solar thermal for water heating, pool heating and space heating, as well as passive space heating and daylighting. The N.C. tax credit also applies to an array of other renewable energy resources. The N.C. credit is taken over five years. The federal tax credit of 30 percent applies to solar technologies, including PV, solar hybrid lighting and solar thermal for electricity generation, process heat, space heating and water heating. The other major tax incentive for commercial installations is the accelerated depreciation on the solar equipment (MACRS). Below is a breakdown of the potential economics of a commercial PV system over five years:

Given a 25 percent tax bracket, and assuming the company is able to use the tax incentives over five years:

$100,000 (initial cost for an 11 kw photovoltaic system)
- $30,000 (30 percent federal tax credit)
- $35,000 (35 percent N.C. tax credit)
- $17,500 (tax benefit of MACRS over no more than five years)
- $3,900 (tax benefit of N.C. state depreciation over no more than five years)
+$8,750 (federal tax on N.C. tax credit)
- $14,755 (generated income for electricity through N.C. Green Power at $.21/kwh over five years)
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$7,595 (total remaining of initial investment after five years)

What kinds of tax credits are available to contractors for home energy efficiency?

Contractors of new homes are eligible for a $2,000 federal tax credit if their home is certified by a Home Energy Rater to be 50 percent more efficient than the 2004 International Energy Code. This credit is available per home and is part of the general business credit.

Reaching the 50 percent threshold for the credit is difficult — but possible — to achieve, and the benefits of a 50 percent reduction of energy use are long-lasting for homeowners and the environment.

If you are interested in taking advantage of these tax incentives, the WNC Green Building Council encourages you to consult with your tax accountant to find out how they would work with your unique tax situation.