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 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.
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 26% 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
2019 - 30%
2020 - 26%
2021 - 26%
2022 - 26%
2023 - 22%
2024 and after - 10%