Residential tax credits

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 (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 only owe $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 tax credits are available for residential renewable energy?

The federal government offers a 30 percent tax credit for solar equipment, fuel-cell and microturbine property, small wind-energy systems and geothermal heat pumps. This credit has been extended until 2016. 

Updates to this credit are:
• In 2008, there was a $2,000 cap on qualified solar-electric and solar-water-heating property. Now, there is no cap on solar-electric systems.
• Geothermal heat pumps are now eligible for this credit up to $2,000.
• Wind is eligible at $500 per .5kW up to $4,000.
• Tax credits are now able to be taken against Alternative Minimum Tax (AMT).

Plus, for renewable-energy property that serves a single-family residential unit, North Carolina offers a 35-percent tax credit of up to $1,400 for water heating (pool heating included); $3,500 for active- and passive-solar space heating and combined active space/hot water systems; and $10,500 per installation for photovoltaic, wind and hydroelectric systems. The credit must be taken for the taxable year in which the property is placed in service and cannot exceed 50 percent of the taxpayer’s liability reduced by the sum of all tax credits. Any unused credit may be carried forward for 10 succeeding years. This credit expires in 2010. However, if the renewable-energy property for which a credit is claimed is disposed of, taken out of service, or moved out of N.C., the credit expires and the taxpayer may not take any remaining installment of the credit, except for that portion of an installment that accrued in a previous year and was carried forward.

What kinds of tax credits are available to builders and developers 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 in heating and cooling than the 2004 International Energy Conservation Code (IECC). This credit is available per home and is a part of the general business credit. This credit has only been extended through the end of 2009. The credit also applies to manufactured homes and provides for either a $2,000 or $1,000 credit, depending on whether the home is 50 percent or 30 percent more efficient than the IECC.

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.

What kinds of tax credits are available for home energy efficiency for homeowners with existing homes?

Federal energy-efficiency tax credits are available to homeowners for a variety of upgrades. These credits expired in 2007, which means they are not available for 2008 expenditures. However, the credits were reinstated for the 2009 calendar year, so this upcoming year is a good time to consider purchasing improvements. Keep in mind that there is a $500 limit on the combined credit for any of the following upgrades.

• Exterior windows: 10 percent of the total material costs up to $200
• Criteria: Must be Energy Star qualified or meet 2000 IECC.

• Insulation, storm doors, exterior doors, air sealing, Energy Star roofing: 10 percent of the material cost up to $500
• Criteria: Insulation, storm doors, exterior doors and air sealing must meet 2000 IECC. Roofs must meet Energy Star criteria.

• Central AC, heat pump, water heater: 100 percent of total installed cost up to $300
• Criteria: For qualifying criteria, visit http://www.energytaxincentives.org.

• Furnace or boiler: 100 percent of total installed cost up to $150
• Criteria: Must have an AFUE of >95 percent.

Other financial incentives for energy-efficient homes include:
• $500 permit fee rebate from the town of Black Mountain
• $100 fee rebate for Energy Star homes and an additional $100 for HealthyBuilt Homes from the City of Asheville
• $400 rebate to builders for Energy Star homes from Progress Energy

Commercial tax credits

What tax credits are available for commercial renewable-energy systems?

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 state tax credit also applies to an array of other renewable energy resources, and it must be taken over a five-year period. For commercial business properties, there is a $2.5 million limit on tax credits taken in N.C., and it cannot exceed 50 percent of the taxpayer’s liability.

The federal tax credit of 30 percent applies to renewable-energy technologies, including PV, solar hybrid lighting and solar thermal for electricity generation, process heat, space heating and water heating (passive solar systems and solar pool-heating systems are not eligible), wind turbines up to 100 kilowatts in capacity and fuel cells. There is also a 10 percent tax credit for geothermal energy property, including geothermal heat pumps.

The following caps on tax credits apply to the federal credit:

1. There are no caps on eligible solar equipment.
2. There is a maximum credit of $4,000 for small wind systems.
3. The credit for fuel cells is capped at $1,500 per 0.5 kw of capacity.
4. For geothermal systems, the credit is equal to 10 percent of expenditures, with no maximum credit limit.

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 for typical commercial PV systems, spread 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 state tax credit)
- $17,500 (tax benefit of MACRS over no more than five years)
- $3,900 (tax benefit of state depreciation over no more than five years)
+ $8,750 (federal tax on state tax credit)
- $14,755 (generated income for electricity through NC GreenPower at 21 cents/kwh over five years)
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$7,595 (total remaining of initial investment after five years)

What tax credits are available for commercial building energy efficiency?

There is currently a federal tax deduction for $0.30 to $1.80 per square foot for energy-efficient commercial construction, depending on technology and amount of energy reduction. For more information, visit http://www.efficientbuildings.org. This credit has been extended through the end of 2013.

For complete details on the tax credits, visit http://www.dsireusa.org.

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.

Matt Siegel is director of the WNC Green Building Council. He can be reached at or at (828) 254-1995. Chad Storck is a certified public accountant at Dixon Hughes PLLC.