The state Department of Taxation issued new rules today that will effectively limit the ability of homeowners to claim multiple tax credits for the installation of solar photovoltaic systems.
The “temporary administrative rules” include language defining a photovoltaic system by its output capacity in an attempt to clarify what constitutes an eligible PV system for tax purposes, department officials said. The rules will be effective for PV systems put in place starting Jan. 1.
Current law allows homeowners to claim an income tax credit of 35 percent for PV systems with a cap of $5,000 per system. However, because the way solar technology has evolved and tax guidance has been interpreted, many homeowners have installed multiple PV systems on their properties, claiming a state credit for each system and effectively eluding the cap.
Under the new rules a PV systems of any size will still be eligible for the 35 percent credit. But for purposes of the cap a homeowner will be allowed one credit for each five kilowatts of PV generating capacity. For example, the tax credit for a home with a five-kilowatt PV system would be capped at $5,000. The credit for a home with two five-kilowatt systems would be capped at $10,000.
A five-kilowatt PV system is typical for a household using 500 kilowatt hours to 600 kilowatt hours of electricity a month.
The Tax Department in 2010 issued guidance on the matter to taxpayers in response to concerns that the some PV system owners were having their projects broken into multiple systems in order to circumvent the cap. The department tried to address the issue by issuing several tax information releases (TIRs) that stated the number of PV systems on a property was determined by the number of independent connections to the main utility meter or circuit breaker.
Despite the guidance Tax Department officials continued to receive calls and complaints from taxpayers and tax accountants saying the rules were still confusing, according to Fred Pablo, department director.
“The TIRs 2010 didn’t do the job,” Pablo said. “They allowed an electrical engineer to sign off on matters that could be interpreted as tax avoidance. You should not have electrical engineer determine what is eligible for a tax credit,” he said. “You had one PV installer saying a project was three systems and another saying it was one system. There was no consistency.”
Solar industry executives maintain that whatever confusion existed in the past has mostly been resolved, and that some homeowners need multiple systems for valid engineering reasons or physical site limitations.
The Blue Planet Foundation, a Honolulu-based clean energy advocate, said the rules will have a negative impact on the state’s effort to reduce its dependence on petroleum.
“Until now, solar energy installations have been a remarkable bright spot in Hawaii’s economy,” Foundation Executive Director Jeff Mikulina said in a prepared statement. “Catalyzing hundreds of millions of dollars of private investment in Hawaii’s clean energy future, the state’s existing 35 percent renewable energy tax credit has been an overwhelming success, making solar the fastest-growing and largest source of new energy in the Islands.
“The Blue Planet Foundation believes that the Department of Taxation’s proposed rule changes significantly reduce the ability for residents to participate in the benefits of solar energy. The new rules will effectively slash the tax credit in half for the average taxpayer who now chooses to install solar. Homeowners and renters that have yet to adopt solar will have a reduced incentive to take control of their fossil fuel-based energy bills.”
The new rules also set capacity thresholds for multi-family residential properties and commercial properties. For multi-family properties each system for which a credit is claimed must have an output capacity of at least 360 watts per unit per system. Commercial systems must have an output capacity of at least 1,000 kilowatts for each credit claimed.
The PV credits are part of the state’s broader renewable energy tax credit program conceived as an incentive to reduce Hawaii’s dependence on fossil fuel. The credits started coming under scrutiny in recent years as the popularity of PV systems resulted in the loss of more tax revenue than expected.
State lawmakers last session considered several bills that would have curtailed the solar tax credit, but they were unable to reach a compromise before the session ended. Lawmakers will likely revisit the issue again next year.