2015 Tax Extenders Benefiting Commercial Solar Projects
Before taking their holiday recess in late December 2015, Congressional lawmakers passed a landmark $1.1 trillion spending package (the “Act”) that included a historic compromise between supporters of two diametrically different sources of energy: oil and renewable energy. In exchange for lifting a 40-year ban on exports of crude oil produced in the U.S., renewable energy supporters received multi-year extensions of valuable tax benefits that incentivize ever-more adoption of clean energy sources like solar. Here, Cenergy Power briefly summarizes the tax benefits in the Act that are most relevant to commercial solar projects for businesses in the preliminary stages of considering a solar project.
What is the most important commercial solar tax benefit in the Act?
According to GTM Research (the solar industry’s primary source for market research), the extension beyond 2016 of the 30% investment tax credit (“ITC”) was “the most important policy development for U.S. solar in almost a decade.” Cenergy Power agrees with this assessment since the ITC enables federal corporate taxpayers to claim a tax credit worth 30% of the cost of their solar projects, and this has historically been a critical incentive for businesses to go solar.
Specifically, the Act extends the expiration date of the solar ITC under Section 48(a) of the Code in the following manner:
- Solar facilities that commence construction prior to January 1, 2020 will qualify for the full 30% of the ITC.
- For solar facilities that commence construction during 2020, the amount of the ITC will be reduced from 30% to 26%.
- For solar facilities that commence construction during 2021, the amount of the ITC will be reduced from 26% to 22%.
- For solar facilities that commence construction in 2022 or thereafter, the amount of the ITC will drop to 10%.
A placed in service deadline is also specified for solar facilities that commence construction any time prior to January 1, 2022 but which are not placed into service before January 1, 2024. In such instances, the amount of the ITC will also be reduced to 10%. The solar ITC has historically been claimed on IRS Form 3468 line 12b.
What did the Act do with Depreciation?
The Act also extends two key tax expense/ depreciation benefits applicable to solar projects.
First, enhanced Section 179 deductions were extended permanently (until further notice) to enable companies to immediately expense up to $500,000 of the cost of their solar projects with a phase-out starting at $2 million. These amounts were due to fall to $25,000 and $200,000, respectively. The Act retains Section 179 at the higher limits while indexing them for inflation in future years. See Instructions for IRS Form 4562 Part I for more details.
Second, the Act extends “bonus depreciation” for property acquired and placed in service before 2020. Bonus depreciation is 50% for solar projects placed in service before 2018, and steps down to 40% in 2018 and 30% in 2019. See Instructions for IRS Form 4562 Part II for more details.
How do these tax benefits work together?
To get a sense of how these federal tax benefits work together (along with the standard federal MACRS 5-year tax depreciation schedule for solar projects) and the order in which they are applied in Year 1, Cenergy Power sets forth an example of a solar system with a project cost of $1,200,000 (with each tax benefit highlighted in yellow and the total tax dollar value of the tax credits and expense/ depreciation benefits highlighted in green):
To the extent that a taxable business can use these available tax benefits, the combined federal ITC and Expense/ Depreciation benefits for Year 1 alone represents over 50% of a solar system’s cost. If an entity is not taxable (e.g., schools, districts, nonprofits, etc.), cost-effective off-balance sheet financing options (that can pass along much of the tax benefits indirectly through lower recurring lease/ power payments) have become readily available in the solar market.
For more information on commercial solar tax benefits, financing or economics, please reach out to Cenergy Power at firstname.lastname@example.org. Our summary of the Act’s tax provisions applicable to commercial solar projects is general by design. It should not be taken as tax or legal advice, and businesses should consult their tax advisors on their specific tax situation when considering a solar project.