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Installing Solar Panels

Solar Investment Tax Credits

Govenment incentives for clean energy development

Renewable energy is a fast-growing industry

Significant capital expenditures are expected over the next several decades.  One constant during stock market ups and downs, economic cycles, seasonal changes and other uncertainties is the need for electricity.  The growing demand for renewable energy and a push to reduce carbon emissions has only increased the appetite for clean energy sources such as solar, with government incentives providing economic benefits to fuel development.

Today, renewables make up 17% of US capacity, but are expected to make up 25% in 2025 and 64% in 2050


$5-10 Trillion of capital is required to meet future projections for renewable energy capacity needs


37 states have current mandates or goals to increase sustainable renewable power generation
Data provided by US Energy Information Administration, Bloomberg NEF
Clean Energy Investment Tax Credits

The Inflation Reduction Act provided a 30% tax credit for qualifying investments in wind, solar, energy storage, and other renewable energy projects through the end of 2032.  The amount of the credit is determined as a percentage of the taxpayer’s basis in eligible property (generally, the cost of acquiring or constructing eligible property).

Solar Development Partnerships

An investment tax credit (ITC) is a tax credit given to individual taxpayers or corporations that invest in specific types of projects that engage in renewable energy.  Developers of solar projects often provide opportunities for investors to enter partnerships to receive tax credits, depreciation and other benefits such as income.

Tax Credits are one of the most powerful tax incentives available as they reflect a dollar per dollar payment of tax liabilities owed.  Investors in an established LLC have a significant benefit in the ability to allocate profits, losses and ownership percentages, accordingly, to maximize the investor’s tax benefit in the joint venture.  This usually includes the use of debt to increase the economic impact of the tax credit as a percentage of the equity investment.

 

Bonus Depreciation

Bonus depreciation is an accounting method that allows businesses to write off a percentage of the cost of certain assets in the year the property is in service.  The purpose of Bonus Depreciation is to encourage businesses to invest in new equipment and machinery, providing a tax incentive to do so.  The amount you can write off depends on the type of asset.

The IRS sets the amount of Bonus Depreciation that can be taken in any given year, which is subject to change.  In 2020, the maximum amount of Bonus Depreciation you could take was 100%.  However, this amount decreases over time, with the maximum amount falling to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% begining in 2027.

Tax credits and bonus depreciation are subject to the recapture rules within the first five years of taking the benefit.

Zero Leverage Example:
Solar Development Cost        $10,000,000

Solar Tax Credit                                        30%

Economic Incentive                  $ 3,000,000

50% Leverage Example:
Equity                                         $ 5,000,000          
Debt                                            $ 5,000,000
Solar Development Cost        $10,000,000

Solar Tax Credit                                        30%

Economic Incentive                 $ 3,000,000

Percent of Equity                                     60%

Hypothetical Illustration

The illustration below is for hypothetical purposes only and does not represent an actual program.  What this reflects are the several components of potential deductions provided by an investment in a solar development project.

The assumed tax rates are 37% federal and 5% state for a total of 42% with a $100,000 investment.

Tax Credits - Based on the project leverage, the tax credits yielded would be 80% of the initial investment.

Preferred Return - Many programs will pay a nominal preferred cash return over a 5-6 year period.

Depreciation Allowance - Based on the accelerated depreciation, there is a significant amount of depreciation allowance passed through to this investor both initially and over the 6 year period.

Buyout - In year 6, the developer buys out the tax credit investor for a nominal amount.

Screenshot 2023-06-08 191154.jpg

Depreciation Recapture:  This model would produce a significant amount of tax deductions in the initial year of investment and over the 6 year period.  However, the amount paid out may be recaptured during the "Buyout" if the investor does not have additional capital investments or expenses.

Passive Income Only - One of the limitations of Investment Tax Credits and depreciation from solar developments is that it can only be used to offset passive income.  It is important that one consults with their accounting professionals to determine if income generated is active or passive.

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