Why does Analysis show tax liability on incentives?

Tax liability on incentives results from any one of the following:

1. Rebates - When installer receives the rebate and uses it to lower the price, it is not taxable. When customer receives the rebate:
   1. it is considered taxable income if the customer claims the Federal Income Tax Credit using the full retail price as the ITC's basis amount. For example, rebate = $2,000, contract price = $20,000, and customer income tax rate = 25%. Then Federal ITC = 26% * $20,000 = $5,200. And customer's is liable for $500 in tax ($2,000 * 25%). So the net customer benefit is $4,700 ($5200 -$500)
   2. it is not taxable IF, and only if, the customer subtracts the rebate amount from the retail price as the basis for the ITC. For example, rebate = $2,000, contract price = $20,000, and customer income tax rate = 25%. Then Federal ITC = 26% * ($20,000 - $2,000) = $4,680. No tax on the $2,000. So the net customer benefit is $4,680.
   Paying taxes on rebates and getting the full ITC amount is almost always a better approach. Once the ITC drops to 22% it will be worth another look. SolarNexus provides ability to do your calculations in either way.
2. Performance Based Incentives (PBI's) - Payments made to customer for generated kWhs are taxable income.
3. Renewable Energy Credits (RECs) - According to the IRS, payments made to customer for credit of generated kWhs are taxable income.
4. State Tax Credits - Effectively increases federal taxable income (and thus liability) by reducing the deductible state taxes. (See this article). The notion that State Tax Credits create tax liability is frequently missed. State income tax payments are federally deductible.  If you reduce your state tax payments with a credit, then that takes away a portion of the federal deduction commensurately. SolarNexus multiplies the state tax credit total by the customer's federal income tax rate to determine the additional federal tax liability. This practice is recommended as per the Solar Energy Industries Association's (SEIA) published tax manual.

The DOE recently put out an excellent publication to help explain tax issues with incentives: Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics.

If you have questions on what case SolarNexus has determined there to be tax liability, download the cashflows CSV (link at bottom of Analysis results). This CSV file shows detail sufficient to determine where all the various results come from. There are separate tax liability rows for each of the following:

• Tax liability - Buydown
• Tax liability - State Tax Credit
• Tax liability - Performance Based Incentives
• Tax liability - RECs (renewable energy credits)

If you have a question, you can quickly see what incentives are causing the tax liability.