The system owner of solar projects have some valuable tax benefits. Here are some common tax deductions for commercial real estate:
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 400 kW solar system. Assuming a system cost of $2.50 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:
30% Income Tax Credit (“ITC”) $300,000 ($1M x 30%)
100% Bonus Depreciation $419,050
Total Cash Value $719,050
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 $300,000) = $850,000. Assuming your blended federal tax rate is 49.3%, the potential cash value of the bonus depreciation tax deduction is $419,050.
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 $719,050 of cash as soon as they file their 2022 tax return. This represents a 2.39x multiple on their original investment in this example.
When can I take my tax credits and depreciation?
The tax credits and depreciation deductions for new solar projects can be taken in the year which the asset is placed-in-service. You report these on IRS Form 3468 of your tax return. There are safe-harbor rules to protect the 30% ITC (see IRS Notice 2018-59) if at least 5% of the project costs are incurred or paid prior to the end of the tax year, but this merely protects the rate of the credits, not the year in which the credit is taken for tax purposes.
Tax Credit as a Percentage of Cost
Construction begins / Applicable Credit
thru 2032 - 30%
2033 - 22%
2034 and after - 10%
You can CARRYBACK the tax credit 3 years under new rules from the Inflation Reduction Act.
There are add-on incentives for solar projects located in brownfields (+10%), low income communities (+10% to 20%), and communities with retired coal plants (+10%).