Refresher On Solar Tax Incentives
Two Key Federal Solar Tax Incentives
Before digging into the mechanics of Tax Equity Investing, you must first understand the underlying solar tax incentives at play. There are two main Federal solar tax incentives:
30% Investment Tax Credit.
The owner of a solar system is entitled to a 30% Investment Tax Credit (ITC) upon installing a system. The ITC is calculated as 30% of the total system installation costs. For example, a $100,000 solar system = $30,000 tax credit. The ITC declines to 10% for projects completed after 2016, so with anticipated backlogs that year 2015 is the key opportunity year for Tax Equity investors to monetize capture solar tax incentives.
Under the Accelerated Depreciation rules, the owner of a solar system may deduct roughly 20% of the total system cost each year for five years. To be technical, the depreciable basis is the system price less its salvage value minus half of the ITC. To get the value of this deduction in real dollars you must multiply the deduction times the investor’s tax rate, often 36%. Therefore, the annual value of the accelerated depreciation is = 20% * ((Total Cost – 15% Salvage Value) – ½ ITC) * Tax Rate. If you add this up over five years, it typically returns 30% of the total system cost to the owner in after-tax dollars.
Tax Incentives Combined: 60% Payback
When the Investment Tax Credit and Accelerated Depreciation solar tax incentives are combined, the solar system owner gets roughly 60% of the total system cost repaid by the Federal government in the form of lower taxes (i.e. 30% from ITC + 30% from depreciation after tax). Therefore, if a company installs a $100,000 solar system, it will pay $60,000 less in Federal taxes over 5 years.
(Please note: This is a very rough back-of-the-envelope explanation, meaning the calculations are incomplete in some important ways.)