Why Energy Tax Incentives Make Renewable Energy Affordable

55619036_mA firm’s tax position can make or break its success any given year making it an important consideration when examining the firm’s strategic plan. From the firm’s point of view, tax credits and deductions are used to reduce tax liability and keep dollars in the firm’s hands. From the government's point of view tax credits and deductions are used to incentivize investment in new or budding industries as well as provide an equitable situation for businesses to thrive. Considering this, the following article provides a review of how renewable energy tax incentives - credits and deductions - impact a firm's tax position.  

In 2005, the United States Congress passed the “Energy Policy Act of 2005”. This bill had many purposes and provisions; one of them being an Investment Tax Credit (ITC) for solar and wind generators. Having provisions for both commercial and residential purchases, the ITC has been extended numerous times and will now phase out in 2021 for residential properties. Commercially, the ITC goes on indefinitely but in a reduced capacity compared to the current offering. In this article we breakdown the ITC and investigate how asset depreciation can significantly reduce the cost of a solar system purchase.

Investment Tax Credit

The ITC is a federal incentive that comes in the form of a tax credit, not a deduction, based on the total price of a turnkey system installation. Tax credits are applied to your aggregate tax liability after all deductions. The ITC is different from other incentives in the market because it is the only federal incentive for a solar purchase. 

Some states and utilities have incentive programs such as Capacity Cased Incentives (CBI’s) or Production Based incentives (PBI’s) to further incentivize investment in renewables. Capacity incentives are based on the size of the system and production incentives are offered on a per unit of production basis, neither of which operates like the investment tax credit, which only looks at the total system cost and has no upper limit. 

The ITC, as we know it in 2020, is on a declining schedule. In the last year - 2019-20, the ITC fell from 30% to 26%. It will fall again as we enter 2021 to 22%. When 2021 expires there will no longer be a residential tax credit, only a commercial property tax credit of 10%, which will exist indefinitely. This incentive can actually be pushed forward as many as 20 years, so if your business has either expiring or other recent deductions or credits, the ITC can be pushed forward with no loss of value. However, know that the longer this is pushed out the longer the return on investment for your asset.

Depreciation Deductions 

Along with the ITC, solar electric systems also qualify for federal bonus depreciation deduction of 100% in year 1 of ownership. Since the IRS knows these assets are associated with a tax credit they offer to split the difference and allow you to deduct from the value of 100% - ½ of tax credit value. 

For instance, if your asset was $100,000 and your tax credit was 26%, your depreciable basis for the asset would be $87,000. Bonus depreciation was improved in the 2018 tax package moving from 50% of the asset’s value year 1 to 100% of the asset’s value. This incentive alongside the ITC is the largest tax incentives associated with the purchase of a solar array, so it is important to confirm your business has a large enough tax liability to take these in a timely manner so as to provide the highest possible return on investment

The third and final tax incentive for the purchase of renewable energy equipment is a state income tax depreciation deduction. Each state can use a different mechanism, here in Michigan, solar systems qualify for Modified Accelerated Cost Recovery System (MACRS) which is a 5-year schedule of deductions against state owed income tax. Comparatively, this is the smallest of the tax incentives offered for renewable energy assets.

Tax incentives can make a renewable energy project financially viable and improve a firm's tax position, and have driven the adoption of renewable technologies over the past decade. Solar systems qualify for the federal ITC, federal bonus depreciation and state MACRS accelerated depreciation. Act now to secure your maximum tax incentive while improving your business’s bottom line.

Your Next Step?

Have a conversation with a Commercial Solar Consultant to explore whether solar is a good fit for your business. 

Everything you need to know about commercial solar

If you or another business is interested in having an undeniable impact on your triple bottom line give us a call for a free consultation to see if solar is right for you! Call (248) 923-3456 or request a Free Online Solar Analysis for Your Business.

Michigan Solar Solutions is a commercial and residential solar installer and electrical contractor that has served the lower peninsula of Michigan since 2007. We have installed thousands of panels and have a happy customer near you, check out what our customers think of us Guild Quality.

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John Jevahirian, Commercial Solar Consultant

Written by John Jevahirian, Commercial Solar Consultant

John graduated from Xavier University in ’17 with a degree in Sustainability; Economics and Management and a Minor in Environmental Studies. John represents MSS as a professional stakeholder in the Detroit 2030 District and as a member of the Detroit Green Task Force.


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