New Tax Bill Makes The Economics Of Solar Energy Even Better
On December 22, President Trump signed the new tax reform bill into law. The bill includes a number of changes to the corporate tax structure, which may leave many of you wondering, how does this new law impact my decision to switch to solar?
The short answer to that question is that the economics for going solar are overall better going forward, though there are a few caveats that need to be highlighted. With that said, let’s walk through the new bill’s impact on solar.
The Investment Tax Credit: First, let’s talk about what didn’t happen. The big win for solar here was the fact that the Solar Investment Tax Credit (ITC) was left untouched. Companies can still claim a tax credit valued at 30% of the system cost until 2019.
The Corporate Tax Rate: The largest, most obvious change in the tax bill is the drop in the corporate tax rate from 35% to 21%. This improves a solar project’s post-tax returns in a couple ways.
If you own solar in a state with SRECs (New Jersey), taxable rebates (New York) or Feed In Tariff (a program where you sell energy to the utility), you will lower the tax on that revenue, significantly improving the post-tax returns of your solar investment.
There are some less intuitive benefits as well. Perhaps the main selling point for solar is that it lowers your operating expenses through a smaller utility bill. However, operating expenses lower your taxable income, so generally a drop in expenses raises the amount of taxes you pay each year. This effect slightly offsets some of your savings from solar. So how does a lower tax rate impact this? When the tax rate is lowered, owners of solar system see their post-tax cash flow actually go up. Initial analysis shows that this could boost the Net Present Value of projects by nearly 20% in some cases.
100% Expensing: The other big change for solar project owners is the new 100% expensing rule. Under the old tax rules, the owner of the system could depreciate the system for tax purposes over six years (see table). Under the new rules the system can be expensed immediately, meaning you can depreciate 100% of the depreciable value of the system in the year it was built.
A key thing to note here is that the lower corporate tax rate does lower the depreciable value of the system, so overall the depreciation doesn’t give you as much value. In other words, with the tax rate lower, any item reducing taxable income – in this case depreciation – is less valuable. What it does do is give you all the value of depreciation in year one, instead of spreading it out over several years. Net, this depreciation rule is a slight negative to the value of the system.
Overall, when the lower tax rate and 100% expensing are combined, you get noticeably better project economics, as the table below shows. The Net Present Value of your project will likely improve by 20-30%
Third-Party Owned Solar: This all may sound great for owners of solar energy systems, but what if you just want to lease the equipment or buy solar energy from a third-party, via a power purchase agreement? There’s good news and bad news here. The good news is that all the above benefits apply to the third-party owner. Since their returns have improved you should see some of that benefit pass through to you via lower prices. Plus, you can work with a broker like SolarKal who will ensure you maximize the benefits
being passed on to you.
The one bit of bad news is that a lower overall tax rate means not as many solar investors have the tax appetite to take advantage of the ITC. There is a finite pool of tax equity available and the new tax bill shrinks that pool, pushing some tax investors out. This will not be a major issue long-term, but as investors figure out how these new tax rules impact them, there may be some short-term difficulties in the market.
Conclusion: In many states, including New York and New Jersey, solar has already been economical for many businesses and organizations. Now, lower tax rates and immediate depreciation boost the overall economics of a solar project, offering a sound clean energy investment that improves your business’s operating cash flow.
SolarKal is not a tax expert and the above information does not constitute tax advice. This material is for
informational purposes only, and you should consult your own tax, legal and accounting advisors before
making any decisions.
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