Changes to the Solar Credit

by Tom Yamachika, President, Tax Foundation Hawaii

The legislative bill that we have received the most questions about is Senate Bill 3125, the bill that modifies individual tax rates. But the part that has drawn the most questions hasn’t been the tax rates, whether they be pauses, stops, hikes, or whatever else. Rather, everyone is asking about what is going to happen to the renewable energy technologies credit, which we sometimes call the solar credit although it applies to wind and other technologies.

In this week’s column, we will try to explain what changes are being made to the credit and when. The column is based on the bill as it now exists. We understand that the solar industry is extremely unhappy with the bill and is trying to have the Governor veto it (which we think is a tall order because the bill contains tons of material other than changes to the solar credit, and a veto would apply to the whole bill).

The first thing to understand is when the credit is earned. The solar credit isn’t earned when the contract is signed, when the money is paid, or when construction starts. It’s when the equipment is “installed and placed in service.” The Department of Taxation’s Administrative Rules section 18-235-12.5-01 defines that event as when all costs have been incurred, the installation is completed, and requests for inspection have been sent to the appropriate government agencies. If the system fails an inspection and corrective work is required, however, the system is not considered installed and placed in service until the system passes the inspection. In other words, the credit is earned when the system owner can turn it on and operate it legally.

Now, let’s go to the three significant changes to the solar credit in SB 3125.

First, there is a new income cap. If the taxpayer’s adjusted gross income is at least $175,000 for a single taxpayer or $350,000 for a married couple, then the credit is disallowed in full. It’s unclear what happens if a corporation owns the system because Internal Revenue Code section 62 defines adjusted gross income only for individuals, meaning that corporations don’t have adjusted gross income. That change goes into effect for taxable years beginning after December 31, 2026.

Second, there is an aggregate cap of $40 million statewide for each year from 2027 to 2030, and the credit is dead for taxable years beginning after December 31, 2029. This relates to the third change, which is that there is a new certification procedure required, effective for taxable years beginning after December 31, 2025. Taxpayers who have completed an alternative energy installation need to file some forms with the Hawaii State Energy Office before March 1st of the following year. The HSEO will then notify each qualifying taxpayer of the amount of credit awarded, which may be somewhat less than what the taxpayer applied for if total statewide claims exceed the $40 million statewide cap.

This means that calendar year taxpayers who have 2026 installations will need to apply for HSEO certification. Presumably, if the installation was finished and all inspections were passed in 2026, there would not be much for HSEO to review because neither the income limit nor the statewide cap kicks in until 2027. For 2026 systems that get done toward the end of the year, there may be particular scrutiny of the inspections to see if the systems indeed passed in 2026 as opposed to 2027, when the statewide cap and the income limits become effective.

Taxpayers making plans to install alternative energy in the 2029-30 time frame also need to watch out. Although there is a $40 million aggregate limit in 2030, calendar year taxpayers finishing installations in 2030 won’t be able to get any credits at all because of the sunset date. The $40 million limit in 2030 can only be used by fiscal year taxpayers whose year starts in 2029 and ends in 2030.

Yes, this is complicated. Look for more guidance to come out of the State if the bill is enacted.