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Is this the year to lower your taxes while helping the environment?
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Is this the year to lower your taxes while helping the environment?

TThere is a renewed interest in investing in solar energy technologies in the United States. The solar investment credit (ITC), which can be used to offset federal tax liabilities (corporate and personal), is a percentage of the price of a solar photovoltaic system (PV) that was installed during the tax year. The credit amount varies from year to year. It is based upon a sliding schedule that Congress authorized in December 2020 as part of legislation to extend federal tax credits.

Panel systems that were purchased before 2020 for commercial solar projects will be grandfathered at the 30% tax credit. Thereafter, For systems, the credit is 26%Systems that begin construction in 2020-2022 will be eligible for 22% tax credit, while systems that begin construction in 2023 or later will be eligible for 10%. No matter the date of construction, any PV system that is created after 2025 will not be eligible for a maximum 10% tax credit.

The TCJA (Tax Cuts and Jobs Act of 2017, Bonus Depreciation) allows panel systems to be eligible. This means that between 85% and 7% of eligible system costs can be deducted from your tax bill for the current year.(1) For state income tax offsets, the system costs can be depreciated according to the Modified Accelerated cost Recovery System (MACRS), five-year property rule. This offsets future state taxable income from an operating business or an earn out from a liquidity event.

Commercial Solar Projects and Tax Credits

Since solar investment tax creditsThey are general business credit and are subject to utilization thresholds which limit the tax credit to 75% a taxpayer’s current year tax liability. Any excess solar credit can be carried forward for 20 years or carried back one year.(2)

Through Purchase Power Agreements (PPA), which are paid by the purchasers, commercial solar projects can generate significant cash flow for investors over 20-25 years. Be on the lookout for recapture of depreciation. If the solar company is sold or disposed of within five years, then the ITC will be recaptured and added to income in the year that it was disposed. The ITC is not subject to recapture if the solar projects are held for six years. There are pension funds and insurance companies that will buy your income stream from the solar project. This is based on the Net Present Value (NPV), which is the projected future cash flows.

Take a look at the savings you could make

The primary driver of most solar project investments is the tax advantages. Currently, unless a project is Safe Harbored at 30 percent, there is a 26% Federal Investment Tax Credit. This allows the investor to offset any federal tax liabilities, dollar for dollar. The ITC is calculated simply by multiplying the investment amount with 26%.

If an investor purchases a project worth $3 million, the tax credit is $780,000. Commercial solar projects are eligible for 100% bonus depreciation. This is in addition to the Federal ITC. The bonus depreciation can be deducted 50% of the ITC value, or 87% of the investment amount, and then applied to the year of investment. An example would be a $3million investment. The investor would be eligible to depreciate 87%, or $2610,000. The value of the bonus deduction is $965,000. If the investor is unable to absorb the depreciation in the current year they can carry forward the net operating loss for up 20 years.

The investor has almost immediately received $1,745,700 in tax and credits back from the original $3 million invested. This is before any leverage or project-level cash flows. PPAs last between 20-25 years. This is a long-term investment that can be very profitable and safe, depending on the investor’s goals.

Moving Forward with Tax Credits

There is a lot of potential growth in the commercial sector. Biden’s administration wants to restore the solar tax credit at 30% and extend it for another 10 years. This would encourage and foster continued development. Incentives for energy are the foundation of this climate change administration. Look out for more incentives and changes to come.

Active vs. Passive vs.

To be eligible for the tax benefits, either capital gains or business income, the taxpayer must be actively involved with the solar project. Active status is a minimum of 100 hours per annum (two hours per semaine) that are dedicated to the management and operation of the business. This includes, but not limited to:

  • Site visits
  • Exploration of solar continuing opportunities.
  • Continuing education via webinars, conferences, research, and time spent on your projects.

For commercial solar project owners, the 100-hour threshold should be easy to meet.

Solar energy is a great option for those looking for new and sustainable tax relief strategies.

(1) Internal Revenue Code (IRC), Sec. 48; Solar PV systems that were constructed before December 31, 2019 are eligible for a 30% credit

(2) Any unused depreciation could have been carried back for two years and forward for 20 years before the Tax Cuts and Jobs Act of 2017, but that changed after the passage of the Tax Cuts and Jobs Act of 2017, (Who Needs Sec. 179 Expensing when 100% Bonus Depreciation Is Available? Thomson Reuters Tax and Accounting. Oct. 5, 2018)

The views and opinions expressed in this article are those of the author and not necessarily those of Nasdaq, Inc.

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