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Tax Incentives

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Disclaimer: this guide is based on information from the U.S Department of Energy, however, this does not constitute professional tax advice or financial guidance.

The two most important solar tax benefits to know about are the Federal Investment Tax Credit (ITC) and Modified Accelerated Cost-Recovery System (MACRS).

Federal Investment Tax Credit

What is the ITC?

The solar investment tax credit (ITC) is a tax credit that can be claimed on federal corporate income taxes for a % of the cost of a solar photovoltaic (PV) system that is placed in service during the tax year.

ITC Percentage Schedule:
  • 26% for systems commencing construction in 2020 and placed in service before 2024
  • 22% for systems commencing construction in 2021 and placed in service before 2024
  • 10% for systems commencing construction in 2022 or thereafter

A solar project is considered to have commenced construction if at least 5% of final qualifying project costs are incurred. Expenses have to be integral to generating electricity, equipment and services have to be delivered within 3.5 months after payment.

Eligibility Criteria for ITC

PV Electrical Systems used by a business subject to U.S. federal income taxes The business claiming the ITC must retain ownership of the system until the 6th year of operation or they will be required to repay a prorated amount of the ITC Located in the United States

Calculating the ITC:

Multiply the applicable ITC percentage by the tax basis (amount invested in eligible property including any solar equipment, installation costs and indirect costs).

For example, if the installed cost is $1,000,000 for a PV system that commenced construction in 2020, the ITC would be calculated as follows: 26% * $1,000,000 = $260,000

Lifetime of the ITC

Any unused ITC Tax Credits can be carried back 1 yr and applied to the prior years income tax return and/or can be carried forward for up to 20 yrs until the tax credit has been utilized

MACRS (Depreciation)

Overview:

Commercial solar PV systems purchased by a for-profit entity are eligible to take advantage of accelerated depreciation (Modified Accelerated Cost-Recovery System, or MACRS).

While the ITC is a tax credit (dollar for dollar reduction in taxes), depreciation represents the periodic, scheduled conversion of a fixed asset into an expense and therefore results in lower taxable income and thus a smaller overall tax liability.

MACRS rules allow the full tax basis minus half (50%) of the ITC to be depreciated over a 5 year depreciation period.

Bonus Depreciation: Systems placed in service between Jan 1, 2018 and Dec 31, 2022 can claim a 100% bonus depreciation in the 1st year if they elect to do so.

MACRS Calculation:

If a for-profit entity spent $1,000,000 for a commercial PV system that commenced construction before Dec 31, 2020 and was placed in service before the end of 2022 the ITC would be 26%. Therefore the reduction to the PV System cost to get the depreciable basis would be:

  • 26% * 50% = 13%
  • 100% - 13% = 87%

$1,000,000 * 87% = $870,000

Total Impact on Tax Liability:

Assuming a corporate federal tax rate of 21% and State Tax rate of 8% (assuming your state allows the same depreciation schedule), the total reduction in tax liability is:

  • 21% + 8% = 29%
  • $870,000 * 29% = $252,300 Avoided Tax Savings from Depreciation
*The Federal portion of the depreciation would be received in year 1 if the Bonus depreciation was elected or received over the standard MACRS 5 year schedule: Yr 1 =20.00%, Yr 2 =32.00%, Yr 3 =19.20%, Yr 4 =11.52%, Yr 5 =11.52%, Yr 6 =5.76%

State Incentives

While federal incentives are the main incentive for solar, many states have their own additional tax incentives. These range from state to state and each have their own criteria for which projects are eligible. The structure of the programs varies as well. The main program structures are:

REC:

A Renewable Energy Credit (REC) represents the green attributes of renewable energy, with each REC certifying the generation of one megawatt-hour (MWh) of renewable energy. Utilities buy RECs from qualifying solar projects to achieve their Renewable Energy Targets.

Tariffs:

A utility will pay the customer a specified amount per unit of electricity that they sell back to the grid. This rate is usually fixed and is contracted over a long period of time; up to 20 years.

Rebate / Grant:

A fixed sum that is awarded to the customer. Rebates are usually provided by the state itself instead of the utility company, unlike many other incentives. This payment can either be given all up front or over a series of events.

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