For better or worse, the U.S. has historically relied on federal tax incentives to foster renewable energy deployment. For solar energy, the 30% Investment Tax Credit and beneficial MACRs depreciation treatment have allowed solar projects to compete with the massively subsidized (and politically entrenched) forms of traditional electricity generation in the U.S., namely coal, natural gas and nuclear.
Whether U.S. businesses elect to own solar systems (and directly utilize the available tax incentives) – or choose to purchase the solar energy through a Power Purchase Agreement (PPA) or via a solar operating lease (and indirectly benefit from the tax incentives) – in all scenarios, the tax aspects are critical drivers of project-level economics.
So now, with the first major overhaul of the U.S. tax code in over 30 years, these changes to tax policy are having a significant impact on the feasibility of companies “going solar” in the U.S.
Key Impacts of the Tax Overhaul on Corporate Solar Projects:
- (+) Corporate Entities will have Additional Capital to Invest – the dramatic reduction in the corporate tax rate, which was lowered from 35% to 21%, will yield substantial cash tax savings that can be re-deployed for accretive capital investment opportunities, such as solar projects. Similarly, businesses that are structured as pass-through entities, such as S-Corps or LLCs, will also typically be subject to significantly lower effective tax rates.Another source of incremental corporate capital available for investment will be the significant cash brought back to the U.S. as a result of the repatriation provisions of the Tax Overhaul.
- (+) Full & Immediate Expensing – despite the 25+ year useful life for solar, under the new tax rules, businesses will be able to immediately expense the cost of a solar project. This 100% immediate expensing treatment will apply for all projects completed through the end of 2022, after which the amount that can be expensed immediately will be reduced by 20% a year through 2026.
- (+) Reduced Project-Level Tax Rates – as a result of the lower tax rates (from 35% to 21% for C-Corps or the 20% deduction for pass-through entities) the tax burden on solar project operating cash flows will be reduced. This reduction will result in higher after-tax returns for businesses. For example, in states with SREC markets (e.g. NJ, MA, CT, MD) or specific solar incentives (e.g. NY, IL, CO), the income taxes associated with receipt of these incentives will be reduced significantly.
- (–) Reduced Value of Depreciation Shield – the reduction in tax rates has an adverse impact on the value of the cash tax savings attributable to the depreciation expense for solar projects. For example, a C-Corp that owns a solar system would receive a smaller depreciation benefit with the new 21% rate versus the previous 35% rate.
- (+) Investment Tax Credit Maintained – oftentimes what doesn’t change is just as important as what does change, and in this case – despite a lot of speculation to the contrary – the primary 30% solar Investment Tax Credit (ITC) was essentially unchanged as a result of the Tax Overhaul. The owner of a solar system will still be eligible for a dollar-for-dollar reduction in income taxes owed in an amount equal to 30% of the total system cost – for all solar projects placed into service prior to the end of 2019 (after which the 30% level will begin to step down).
In addition to the abovementioned tax changes, there are several “second-order” tax provisions, including the new base erosion anti-abuse tax (“BEAT”) and certain limitations on the deductibility of interest expenses deductions, that may selectively impact specific solar project economics.
Overall, the net impact of the Tax Overhaul on U.S. commercial solar project economics will be substantially beneficial for most projects. Even so, the facts and circumstances for each individual solar project can differ dramatically, and as a result, we suggest that businesses select experienced solar power partners to help them navigate the complicated (but often rewarding) solar alternatives available to U.S. businesses today.
EnterSolar is a leading provider of solar photovoltaic solutions to the commercial marketplace. Although we are not Accredited Tax Consultants, we closely monitor the dynamic legislative environment to provide clients with guidance in order to best leverage financial incentives at the regional and state levels.