Is this the year to lower your taxes while helping the environment?
There is a growing and even renewed interest in our country to invest in solar energy technologies. The Solar Investment Tax Credit (CII) can be claimed against federal tax debts (corporate or personal) for a percentage of the cost of a solar photovoltaic (PV) system commissioned in the year of operation. ‘taxation. The amount of the credit varies from year to year. It is based on a rolling schedule authorized by Congress in December 2020, as part of legislation extending existing federal tax credits.
Panel systems purchased before 2020 for commercial solar projects are grandfathered at the tax credit rate of 30%. After, credit is 26% for systems starting construction in 2020-2022, 22% for systems starting construction in 2023 and 10% for systems starting construction in 2024 or later. Any photovoltaic system created after 2025, regardless of the start date of its construction, will only be eligible for a maximum tax credit of 10%.
Panel systems are also eligible to receive the depreciation bonus under the TCJA (Tax Cuts and Jobs Act of 2017). This means that 85% to 87% of eligible system costs can be amortized as a tax deduction in the current tax year.(1) For state tax offsets, according to the tax laws of your state, system costs are amortized under the Accelerated Cost Recovery System (MACRS) Five-Year Ownership Rule. This offsets an operating company’s future taxable income or earnout resulting from a liquidity event.
Tax credits and commercial solar projects
Because solar investment tax credits are general business credits, they are subject to usage thresholds that limit the tax credit to 75% of a taxpayer’s tax liability for the current year. Any excess solar credit can be carried forward one tax year or carried forward 20 years.(2)
Commercial solar projects can provide significant cash flow to investors for 20-25 years through power purchase agreements (PPAs) paid for by the buyers of your electricity. Monitor depreciation recovery. If the solar business is sold or disposed of within five years, the ITC will be recaptured and included in income in the year of disposal. Holding solar projects for six years avoids clawback. If you want to exit the business after five years, there are insurance companies and pension funds willing to buy your solar project revenue stream based on a net present value (NPV) of future cash flows projected.
An overview of what you could save
As noted, the primary driver for most investments in solar projects is tax benefits. Currently – unless a project has been protected at 30% – there is a Federal Investment Tax Credit (ITC) of 26%, which allows the investor to offset, dollar for dollar, any federal tax liability for the current year, the previous year, or for the next 20 years in the future, up to the amount of the ITC. The ITC is calculated by multiplying the investment amount by 26%.
For example, if the investor acquires a project for $3 million, he receives a tax credit of $780,000. In addition to the federal ITC, commercial solar projects are also eligible for a 100% bonus depreciation (deducting 50% of the ITC value once – or 87% of the investment amount) within the year. investment. Using our example of a $3 million investment, the investor would be able to recoup 87% of the $3 million in the first year, or $2,610,000. Assuming a federal tax rate of 37%, the “value” of the depreciation premium is equivalent to $965,700 for the investor (an additional value is derived if the investor is subject to tax from the State). This amortization, if it cannot be absorbed by the investor in the current year, can be carried forward as a net operating loss for up to 20 years.
So, before any leverage or cash flow at the project level, of the $3 million originally invested, the investor recouped, in credits and tax value, $1,745,700 almost immediately. Most PPAs are between 20 and 25 years old, so depending on the investor’s goals, this can be an extremely safe and lucrative long-term investment.
Upcoming tax credits
There is huge projected growth in the commercial solar space. The Biden administration is seeking to restore the solar tax credit to 30% and extend it for another 10 years. This would encourage and support continued development. Energy incentives are the cornerstone of this climate change administration, so expect more changes and additional incentives to come.
Active vs Passive
To benefit from the tax benefits mentioned, whether business income or capital gains, the taxpayer must be active in the solar project. Active status requires a minimum of 100 hours per year (two hours per week) devoted to running the business. This includes, but is not limited to:
- Site visits.
- Exploration of continued solar opportunities.
- Ongoing training through conferences, webinars, research and time spent on your project.
The 100-hour threshold should not be difficult for owners of these commercial solar projects to meet.
For those looking for new sustainable tax relief strategies, solar power continues to be a great option.
(1) Internal Tax Code (IRC) Sec. 48; Solar PV systems whose construction began on or before December 31, 2019 were eligible for a 30% tax credit
(2) Prior to 2018, any unused depreciation could be carried forward two years and carried forward 20 years, but this changed with the passage of the Tax Cuts and Jobs Act 2017 (“Who Needs Sec. 179 Expensing When 100% Bonus Depreciation is Available?” Thomson Reuters Tax and Accounting. October 5, 2018)
Managing Partner, Jeffrey M. Verdon Law Group, LLP
Jeffrey M. Verdon, Esq. is the managing partner of the Jeffrey M. Verdon Law Group, LLP, a trusts and estates law firm located in Newport Beach, California. With over 30 years of experience in designing and implementing comprehensive estate planning and asset protection structures, the law firm helps affluent families and successful business owners solve their toughest problems. complex and most complex. contrarian aims and objectives with respect to estate tax, income tax and asset protection.