There are many Federal and State Government financial incentives in order to make the decision of installing a solar array much easier and much more cost effective. Please understand that although we may be the nations most recognized roofing and solar hybrid contractor, we are not self proclaimed weekend warrior accountants. We recommend consulting with you're financial and tax professionals when considering your tax preparation approach. Here are a few examples of some common and most recognized incentives and practices used for Photovoltaic system investments.
Federal Tax Credits and Incentives: First and foremost, the Investment Tax Credit ("ITC") that has been renewed by the federal government for all 2018 installed photovoltaic systems, allows non commercial (homeowners) and non-residential (business owners) who install a solar power system a 30% tax credit on the cost of the entire system. There is no cap on this amount so whether you install a $100,000 system or a $10,000,000 system, there is no cap on the amount a company can claim as a tax credit against. This is a true tax credit, not a deduction. Tax credits provide a dollar-for dollar reduction of your income tax liability. Meaning, that a $1,000 tax credit saves you $1,000 in taxes. Also, if by choice you choose not to utilize the ITC, it may be rolled into the following tax year if it is unused in the current tax. There are also some state and local utility incentives in the form of additional tax credits and rebates. In many instances, the amount of the rebate increases as the size of the system increases.
MACRS and Bonus Depreciation: In addition to the federal government incentives, businesses may take an accelerated five (5) year depreciation on the cost of the system under the federal Modified Accelerated Cost-Recovery System’s (“MARCS”). So while your company will receive revenue from a solar power system for upwards of 25 years, the total value of that system (in terms of upfront investment) will be taken out of gross income over the five-year period allowed by MACRS resulting in a lower tax liability over the initial five years the system is active. The percentage deductions over the five year term are as follows: 20.0%, 32.00%, 19.20%, 11.52%, 11.52%, 5.76%. Please remember the taxable basis is reduced by half of the 30% ITC. For example, if your entity is in a combined federal and state tax liability of a 25% tax bracket, a $1,000 tax deduction saves you $250 in tax under normal circumstances. If you elect to exercise the use of the ITC, then your MACRS will be equated on a 85% remaining deduction table.
Bonus Depreciation allows an entity to depreciate the solar array investment in the first year of service (2018) of 40%. In the first year of claiming the 40% Bonus Depreciation, you will then reduce your post-ITC basis by 40% before implementing the normal MACRS. See the example below based on a $100,000 solar array investment.
Investment Tax Credit (ITC) 30%
$100,000 = $30,00 Tax Credit
MACRS Tax Basis, half of the ITC reduction / or 85% of the investment
$100,000 = $85,000 New Tax Basis
Bonus Depreciation of 40% (if system is implemented in 2018)
$85,000 - $34,000 = $51,000 New Tax Basis
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Depreciation Basis $51,000 (basis after bonus depreciation)
MACRS Depreciation 20% 32% 19.2% 11.52% 11.52% 5.76%
Depreciation Expense $10,200 $16,320 $9,792 $5,875 $5,875 $2,937
Bonus Depreciation $34,000
Total Depreciation $44,200 $16,320 $9,972 $5,875 $5,875 $2,937
State Incentives: Many states have Photovoltaic tax incentives and local utility rebates. These benefits are state and municipaility derived so it is important to research these at that level prior to tax preparations.
"Net Metering" is a policy which means that you only pay for the net amount of electricity that you use. With net metering, businesses with installed solar power systems, can “Bank” the excess unused electricity their solar system generates during peak sunlight hours and receive credit up to 100% of their electric use bill at the full retail electricity price that they can use later to offset their bill even further. In layman's terms, the unused energy your system produces during peak daylight hours, will be fed back into the grid as a credit which in turn allows you to deplete during other hours of the day when your system isn't producing as much or at all.
Property Taxes: Also, many states have even gone so far as to exempt the value of a renewable energy source from a building owner’s property taxes. Unlike other improvements, businesses would not have to pay increased property taxes even though the value of your building may increase with a solar power system.