tax & business incentives for solar

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The system owner of solar projects have some valuable tax benefits.  Here are some common tax deductions for commercial real estate:

• Federal Income Tax Credit - 30% of cost thru 2032, decreasing to 22% in 2033, and then 10% beginning in 2034.  This is a $ for $ reduction in your tax bill.  If the tax credit exceeds your tax liability you can roll the credit into future tax periods for 20 years. The amount of the tax credit is 30% of the total solar system cost.  There are additional add-on incentives available too. If your commercial property is held in a partnership, the tax credits will flow through to your partners K-1s.  

• Accelerated Depreciation.  You can choose to deduct 100% of the cost of your system under the favorable bonus depreciation rules  or take 5-year MACRS accelerated depreciation.  Note that the bonus depreciation begins to phase out beginning in 2023 (80% in 2023, 60% 2024, 40% 2025, 20% 2026) but you can still take MACRS on the portion that is not eligible for bonus.  These deductions typically would flow through partner K-1s, so the value of the deduction depends on the partners tax rate.

• State Income Tax Incentives.  In addition to federal depreciation, you also enjoy depreciation benefits in your state.  Click here to see which states work best for solar.  

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 2023 and recoup $719,050 of cash as soon as they file their 2024 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.