A relative of mine is thinking of installing a solar system on his house. He wants to take full advantage of the solar energy tax credit, however his income is low enough that he doesn’t pay much in taxes, and he wouldn’t get much back. So he asked me if I could be the owner of this system and lease it to him, with him putting up the money, receiving the energy and SRECs, and me taking the tax credits and refunding that money to him.
He initially offered it in the form of a deal where I would make some sort of profit, but I declined that. I want him to assume 100% of the risk, and in that case I’m not comfortable making any profit. And if there’s no risk, then I don’t mind helping him out. However, despite our deal calling for him to assume all risk, I would not be happy if it ended up not working as planned, and me having to call in my “no risk” clause.
Issues I can think of are as follows:
[ul]
[li]Is it completely certain that a person can claim a solar tax credit for a system they install on someone else’s house?[/li][li]My taxes are a bit complicated, with me owning some MLPs with K-1 forms which come with exotic entries (e.g. energy depreciation and depletion), and a real estate investment property etc. So my question is whether the solar tax credit interacts with other forms of income or write-offs in a manner which would limit or cap it in my case.[/li][li]Am I or he going to have to pay taxes on “income” derived from these various financial arrangements? (E.g. me paying taxes on his lease payments. Or perhaps this would be offset by system depreciation. I think the idea is that he would pay me the lease money upfront and I would use it to pay for the system. At some point in the future - presumably when the lease money runs out - I would sell him the depreciated system for some nominal price.)[/li][li]If I later decide that I want to install my own system on my house, am I able to take a new credit, or is there a limit since I’ve already taken one?[/li][/ul]
Besides for that, there are of course potential “unknown unknowns” that I am not even contemplating.
Any thoughts from knowledgeable people? (FWIW, I believe this is not my relative’s idea, but is something being promoted by the solar people.)
First off, it’s a credit not a deduction, so as long as he pays more taxes than the cost of the system, he gets it back in full. And of course this means not just the tax he pays next April 15 but everything withheld as well.
Secondly it’s a fiver-year carry over credit so if he pays more taxes in the next five years than the cost, he gets it back.
Finally, you must own the system to get the credit. You cannot lease it. That covers the normal situation when a utility puts it in and leases it to you. Exactly how it would apply in your case I’m not sure, but I suspect you would not be considered the owner and could not take the credit.
The Residential Solar Energy Credit is available to a taxpayer only if the taxpayer resides in the property. See IRC Sec 25D(d)(2).
There is a separate general business credit in IRC Sec. 48(a)(5)(D). Note that solar panels used to heat a swimming pool are excluded from this credit. I don’t know if you would be eligible for this credit if you didn’t own the underlying property.
Please consult a tax professional before entering into this type of agreement. Don’t wait until after you have made the deal, you may regret it.
There are also things you can do to generate additional income tax liability:
Sell some stock or mutual funds at a profit and immediately repurchase it. This will generate a taxable event. Also note that the “wash sale” rules only apply to securities sold at a loss. It’s perfectly legal to sell something at a profit and immediately repurchase it.
Convert some standard IRA assets into a Roth IRA. You have to pay taxes on the money withdrawn from an IRA, but the money you transfer into a Roth IRA is then tax-free upon withdrawal.
If you’re sufficiently old, you can just withdraw money from any form of retirement fund to generate a taxable event.
I was in the same boat as the OP’s friend. I had a large tax credit but insufficient tax liability to cover the credit amount. My credit was a “use it or lose it” credit. In my case, I converted regular IRA money into a Roth IRA.
Of course, the tricky part here is knowing how much tax liability to create. What I did: I bought TurboTax as soon as it was available (in November). I then “did my next-year taxes” in the present year, estimating everything as closely as possible. With that done, I then started plugging in values to the IRA withdrawal line until I came up with enough tax liability to cover the credit.