tax & business incentives for solar

The system owner of solar projects have some valuable tax benefits:

• Federal Income Tax Credit 26% of cost.  This is a $ for $ reduction in your tax bill. IRS.GOV TAX FORM

• Accelerated Depreciation.  You can choose to deduct 100% of the cost of your system or 5-year MACRS accelerated depreciation.   In March 2020, the CARES Act granted taxpayers a 5-year NOL (net operating loss) carry back. What does this mean for property owners? This means that property owners who place their solar project in service in 2020 can deduct nearly the entire cost of the project to create an operating loss and carry back the loss up to 5 years to generate a tax refund.   IRS.GOV CARES ACT SUMMARY

• State Income Tax Incentives.  For example, California is currently offering rebates for energy storage systems (batteries) for your solar project.  CALIFORNIA PUBLIC UTILITIES COMMISSION

Here is an example of how valuable these tax benefits can be: Let’s say you own an 80,000 SF building that needs a 500 kW solar system. Assuming a system cost of $2.00 per watt or $1,000,000, below is a recap of the cash value of the year 1 tax benefits of owning your $1,000,000 solar project:

26% Income Tax Credit (“ITC”)    $260,000 ($1M x 26%)

100% Bonus Depreciation             $270,000

Total Cash Value                                  $530,000

The amount eligible for bonus depreciation is reduced by 50% of the ITC. So, in this case, the tax basis eligible for depreciation is $1,000,000 less (50% x $260,000) = $870,000. This means you can potentially deduct and carry-back $870,000 to offset prior year income.  Assuming your blended federal tax rate is 30%, the potential cash value of the bonus depreciation tax deduction is $870,000 x 30% = $270,000. 

For credit-worthy borrowers, a solar project can be financed with approximately 30% cash down payment. The balance of the system can be financed with debt under a variety of structures. In this example, a property owner can make a $300,000 down payment in 2020 and recoup $530,000 of cash as soon as they file their 2020 tax return. This represents a 1.77x multiple on their original investment in this example.

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