NORTH CAROLINA issued guidelines in October for state tax credits for investing in renewable energy equipment.
The state allows a 35% tax credit to be claimed on new solar, wind, geothermal, biomass, hydroelectric and combined heat and power equipment. It is available for equipment placed in service through 2015. The credit is claimed entirely in the year the equipment is put in service if the equipment is put to personal use. It is claimed ratably over five years if the equipment is put to business use.
A homeowner with a rooftop solar system who sells all of its output to the local utility and buys back what it needs is putting the system to business use.
The credit belongs to the person who put the equipment in service. However, if the equipment is leased, then either the lessor or the lessee may claim the credit. It belongs in the first instance to the lessor, but the lessor can pass it through to the lessee by providing the lessee a “written certification that the lessor will not claim the credit.” It does not matter whether the lease is a capital lease or an operating lease.
The state has issued several rulings about strategies for transferring tax credits. These rulings are private. However, leases are the preferred structure. The tax credit is claimed by a partnership of a state tax equity investor and developer that then leases the project in form immediately after placing it in service to a separate partnership of a federal tax equity investor and the developer. The “lease” is treated as an installment sale of the project to the lessee for federal income tax purposes. The North Carolina Department of Revenue put in the guidance what it has said in rulings so that it will not have to keep answering the same questions.
The tax credit is 35% of the cost of the equipment. If a lessee claims the credit, then the “cost” is eight times the annual rent, unless the lessor claims a federal investment tax credit or Treasury
cash grant on the equipment, in which case the credit is calculated by the lessee on the lessor’s cost or possibly on the fair market value of the equipment. The state expert on the credit is unsure whether fair market value can be used, but says the state follows the federal basis rules.
Under the federal rules, the lessee calculates its credit on the fair market value. In all other cases, “cost” means cost.
The cost must be reduced to the extent the equipment was paid for partly with public funds. However, there is no reduction on account of having received a Treasury cash grant. The credit cannot be used to offset more than 50% of tax liability in a year. Unused credits can be carried forward up to five years. There is no recapture of the credit if the equipment is sold, destroyed, retired from service or moved out of state. However, any remaining installments of the tax credit could not be claimed. (Vested, but unused, credits can still be carried forward.)
Equipment will be presumed to have been taken out of service if it is shut down for repairs and the repairs do not start within 60 days. A “detailed” explanation must be sent to the state tax authorities to avoid the presumption. Suppose a partnership places a project in service for business use, the first installment of the tax credit is claimed by partners A and B and then B sells his interest in year 2 to C. A and C can continue sharing in the remaining installments of the tax credit unless the sale of B’s interest causes the partnership to terminate for federal income tax purposes. The state views the credit as belonging to the partnership. If the partnership terminates, then it no longer exists.
The credit can be claimed on improvements to an existing project, but only if they increase the generating capacity. If the improvements are entirely new equipment, then a credit can be claimed on the full cost. If the improvements replace other equipment on which a credit was already claimed, then only a fraction of the replacement equipment qualifies.
The fraction is the increase in capacity divided by the capacity after the replacement. Thus, for example, if the capacity of an existing solar facility is increased from 50 to 55 megawatts by replacing some of the equipment, and a credit was already claimed on the project, then the credit on the improvements is on 5/55ths of the cost.
No credit can be claimed on a battery added to an existing solar system since it does not increase the capacity.
The amount of credit is capped. Only $2.5 million may be claimed “per installation” for equipment put to business use. The cap is $10,500 “per installation” for equipment put to personal use. These are the limits for solar equipment used to generate electricity and wind, biomass and combined heat and power equipment. An “installation” is equipment that “standing alone or in combination with other machinery, equipment, or real property, is able to produce usable energy on its own.” Each separate array at a solar facility is treated as a separate installation, even though all the electricity passes through a single step-up transformer, as long as there is a disconnect switch allowing each array to be shut down and the array has its own inverter. The North Carolina Department of Revenue said, “Each individual solar energy system should include at least a PV array and an inverter.”
Monitoring equipment can qualify as part of a solar facility, but only up to 5% of the cost of the complete solar system. A battery can be included in the cost of a facility, but only up to 35 KWh of storage capacity per kilowatt of PV capacity (DC rated). If equipment serves two or more functions, such as doubling as the roof or siding, then the “cost” for calculating the tax credit must
be reduced by the cost of a comparable product for the non-solar function.
A fuel cell that runs solely on gas qualifies potentially as a combined heat and power system, but only if it qualifies for a federal investment tax credit as a CHP system. If the fuel cell runs on biomass or biomass and gas, then it may qualify as biomass equipment, but there is a reduction in the credit in that case to the extent there is co-firing with gas.