Solar Tax Incentives Basics in 2013

Two Key Federal Solar Tax Incentives

Before digging into the mechanics of Tax Equity Investing, you must first understand the underlying tax incentives at play. There are two main Federal tax incentives for solar:

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’s eligible installation costs (for a breakdown on this, check out our ITC Eligibility Matrix). As a simple example, a $100,000 solar system = $30,000 tax credit.

Accelerated Deprecation.

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.

50% Bonus Deprecation.

For solar systems installed in 2013, system owners are entitled to deduct 50% of the system cost as Bonus Depreciation (minus 50% of the ITC credit) in the first year of ownership. The remaining 50% of the system cost is deducted over the remaining 5 years under the Accelerated Depreciation method discussed above.

Tax Incentives Combined: 60% Payback

When the Investment Tax Credit and Accelerated Depreciation 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.)

About The Author

Brandon Conard is the Director of Zenergy, providing energy finance advisory services to developers and investors. He has more than 16 years of legal and energy experience, with expertise in raising tax equity, early stage project development, commercial energy analysis, solar fund structuring, and project finance. Previously, he was Chief Strategy Officer/VP Structured Finance at HelioPower, CEO of Greenzu, and Director of BlueMap. As former Weil, Gotshal, & Manges attorney, Mr. Conard also understands the changing energy, tax, securities, construction, and environmental hurdles every clean energy project must clear. He’d love feedback on this article. Send it to info@zenergy.com.