If you are considering installing a solar project on your business facility, your company may qualify for an investment tax credit under the Comprehensive National Energy Policy Act of 1992. This credit is more commonly known as the Business Energy Tax Credit.

If your company invests in or purchases solar energy property that qualifies under the tax credit, you may be able to take up to 10 percent of the investment and installation amount when income tax forms are filed. The credit, however, cannot be claimed for solar projects used mainly outside the United States, used by government or foreign organizations, or used by a tax-exempt organization (unless the solar property is used mainly in an unrelated trade or business).

What solar projects are eligible?

Some of the most common projects that qualify for the tax credit include:

Photovoltaic (solar electric) systems for lighting, pumping, generating electricity, etc.

Solar water heating systems for domestic water or process heat.

Solar space heating or cooling systems.

"Dual use equipment" (equipment that uses both solar and non-solar energy) only if the equipment's use of non-solar sources does not exceed 25 percent of its total energy input in an annual measuring period, and only to the extent of its basis or cost allocable to its use of solar energy.

Essentially all systems designed to use solar energy to generate electricity, to provide hot water for domestic use or process heat, or to provide building heating and/or cooling are eligible for the tax credit. Property that qualifies for the credit includes storage devices, power conditioning equipment, transfer equipment and related parts and equipment up to (but not including) the stage that transmits or uses the energy.

To qualify, solar property must be:

Completely installed and operational in the year in which the credit is first taken.

Constructed, reconstructed or built by or at the taxpayer's request.

Originally used by the taxpayer if acquired by the taxpayer.

In conformance with any performance of quality standards prescribed by regulation.

Subject to depreciation or amortization.

What does the tax credit exclude?

According to the legislation, solar energy property does not include:

The material and components of passive solar systems even if combined with active solar systems. A passive solar system uses the structural components of the building and does not rely on separate equipment to collect or distribute heat. An active solar system, which is eligible, uses hardware such as solar collectors to collect solar energy and mechanical equipment to distribute the collected heat.

Solar swimming pool heaters.

Industrial process heating systems that generate steam.

What tax forms do I need?

You will need Form 3468 (Investment Credit) and you may need Form 3800 (General Business Credit) as well as the corresponding instruction forms to receive the tax credit.

What are the limitations on the tax credit?

The credit may only be taken on investments or portions of investments which are not subsidized. Subsidized funds include energy financing or tax-exempt bonds. In addition, you may not take a tax credit that exceeds the total tax owed, but you may carry the excess tax into other years.

Be sure to check with your financial or tax advisor to determine if a proposed solar investment is eligible for the credit.