The Solar Investment Tax Credit (ITC) was established as part of the Energy Policy Act of 2005 with the goal of increasing the US renewable energy market. Many cooperatives are interested in using renewable energy. There are some important things to know about how a co-op corporation can use solar credits that may change how you structure the installation of a solar array. Contractors and others promoting solar installations may not be familiar with the nuances of co-op taxation so they may not give you accurate information.
The most common project that co-ops are entering into is the installation of solar panels on parking structures, roofs, or other areas on the co-op’s property. The qualifications for energy property are included at https://www.irs.gov/pub/irs-pdf/i3468.pdf on pages 5 and 6.
For most corporations, including co-ops, that are eligible for the Solar Investment Tax Credit, the credit will be a percentage of the total cost of the eligible property as follows:
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The tax credit can be used to offset income tax incurred in the same tax year that the energy property is placed in service. In most corporations, the credit can be carried forward if it can’t all be used in the first year. The IRS allows most corporations to carry forward the unused credits to each of the 20 tax years after the year of the initial credit.
This is different for co-ops since they are not allowed to carry forward unused solar tax credits. Co-ops are required to allocate the investment credit in excess of the initial year tax liability to patrons. Internal Revenue Code Section 46(h) says that to the extent that a taxable cooperative cannot use the investment tax credit component of the general business credit in the year that the property is placed in service, the unused credit cannot be carried back or forward by the cooperative but is instead allocated to its patrons. Allocation of an unused credit among patrons would be done in the same way that a patronage dividend would be allocated for the co-op. For example, for many food cooperatives, the credits would be allocated based on the percentage of total purchases by each patron in a tax year. Since a food co-op typically has significant sales to non-members some of the credit would have to be allocated to them and would be lost. In combination with other logistical challenges, a food co-op cannot use solar tax credits in excess of current year federal income taxes. Some other co-ops may not have this limitation and could readily allocate the credits to its members.
Since federal energy tax credits cannot be carried forward by a co-op it changes the analysis of the financial cost of a solar project. If a co-op does not generate sufficient taxable income, if it has net operating losses carrying forward, or allocating credits to patrons in not feasible, some or all of the credits will not be usable and will be lost. Not taking the credits still allows the co-op to save on electricity costs and lower its carbon footprint but at a higher cost.
There are other options for cooperatives that would not normally generate the level of profits required to capture the entire credit in the year that the solar property is placed in service. The most common option is to have a third party purchase the solar array and to charge a fee for the electricity provided to the cooperative. This arrangement would allow the third party to claim the credits on the solar array. The third party would typically offer to sell the solar array to the cooperative after the credit period has expired six years after the solar array is put into service. Overall this financing option would provide a tax savings to the third party which would reduce the overall cost to the co-op compared to a project where the co-op bought the solar array but could not use the credits.
Please contact us with questions and we can help you navigate through the various options.
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