Property owners who install solar – or third parties who install solar on the rooftops or property of solar hosts – are entitled to a number of federal and state tax benefits. These are summarized in this article.
If you or your company is looking to invest in solar this article will provide an overview of your potential tax benefits with this important caveat: Each taxpayer’s situation is unique. You should consult your tax, accounting or legal advisors before relying on any tax benefits.
In recent years many large companies have been surprised to learn that tax benefits that they were counting on did not materialize and their solar systems ended up costing them far more than they had budgeted.
This warning applies to advice received from solar developers and contractors. These companies may think they know your situation but they do not. They are probably excellent at what they do but they are not tax advisors or authorities on income tax or property tax treatment. Moreover, legislation changes constantly and the Internal Revenue Service is known to change its mind periodically regarding the guidance it gives to industry participants.
Note that tax benefits help solar hosts pay for solar system improvements only if the host is a taxpayer. A non-profit institution such as a church or a retired homeowners may not have sufficient tax liability to benefit from the tax credits and depreciation described below. Such solar hosts may wish to take advantage of the third party tax equity financed solar systems described elsewhere. In that case a third party that develops and owns the solar system will enjoy some or all of the tax benefits described below. The solar host (i.e., the owner of the property) will receive the solar electricity produced by the solar system and will likely pay either a lease payment or a price per kilowatt hour produced by the system to the solar developer or other owner of the system.
Investment Tax Credits (ITC). Since 2006 the owners of solar projects have been entitled to a tax credit equal to 30% of the cost of the solar system (excluding certain soft costs such as sales charges and permitting and other related costs such as roof repair in advance of a rooftop installation).
The ITC is scheduled to expire in December 2016; companies or individuals considering solar should keep that deadline in mind. If Congress does not act to extend the ITC it will expire. Alternatively, Congress could chose to phase it out over time. In either event the tax benefit derived from a solar installation could dramatically change for the worse on and after January 2017.
A tax credit is more valuable than a tax deduction. A credit can be applied dollar-for-dollar against tax liabilities. Therefore, if a solar system cost $1 million to install a taxpayer can deduct against taxes for the year of installation $300,000. The taxes, and not simply the taxpayer’s net income, are reduced by the credit.
Depreciation Allowance (Modified Accelerated Depreciation or MACRS). This benefit is available to commercial property owners but NOT to homeowners. Congress has permitted property owners to use an accelerated depreciation table that depreciates the cost of the solar system over a 5 year period instead of over the 20 year life of the asset. The MACRs deduction reduces net income so a taxpayer will effectively benefit only to the extent of its tax bracket. In other words, if a taxpayer is in a 30% tax bracket and if the MACRs table allows the taxpayer to deduct, say, 20% of the cost of the system in year 2 the actual reduction in the taxpayer’s taxes in year 2 will be 6% (20% * 30%).
State Property Tax Offset. Some states such as North Carolina and Louisiana allow taxpayers to deduct from their state tax liability as much as 50% of the cost of their solar system. If the tax benefit cannot be used completely in one year it can frequently be carried over to future years.
Property Tax Exemption. Many states and municipalities provide for 100% exemptions from property taxes for the value of solar system improvements.
C-PACE Structure. Some states and municipalities will provide generous loans to solar hosts who wish to install a solar system. The loan repayments can then be made along with property tax payments. In this way the loan repayment obligation attaches to the property and will follow the property in the event of a sale.