2020 Year-End Tax Guide

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Commercial Solar Incentives

The Commercial Solar Investment Tax Credit (Solar ITC) is an attractive option as a tax minimization strategy for eligible taxpayers. While the ITC has been in existence for many years under Section 48 of the Internal Revenue Code, the Tax Cuts and Job Act (“TCJA”) of 2017 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 both contain provisions that further enhance the potential tax benefits of the Solar ITC. The purpose of the tax credit is to promote the adoption of energy- efficient commercial solar photovoltaic (PV) systems in the U.S. To be eligible for the 30% credit, a taxpayer must have commenced construction of a solar PV system on or before December 31, 2019. The credit decreases to 26% for systems commencing construction in 2020; 22% for systems commencing construction in 2021; and 10% for systems commencing construction thereafter. (Current legislative proposals seek to keep the solar credit at the 30% or 26% level to further incentivize the use of energy-efficient solar PV systems.) A solar project is considered to have commenced construction if: 1. At least 5% of the qualifying project costs are incurred, or 2. Physical work on the project, of a significant nature, or fabrication of project components has commenced.

ELIGIBLE EXPENSES The Solar ITC is calculated by multiplying the applicable tax credit percentage by the cost of the eligible property. Eligible property includes: X Solar PV panels, inverters, racking, balance of system equipment, and sales taxes on the equipment. X Installation costs. X Transformers, circuit breakers and surge arrestors. X Energy storage devices. For example, a qualifying commercial solar PV system with a cost of $1,000,000 which commenced construction in 2019 and was placed in service in 2020 would generate a federal ITC credit of $300,000 ($1,000,000 x 30% ITC Rate = $300,000.) ACCELERATED DEPRECIATION A taxpayer that claims the commercial ITC for a solar PV system placed into service can also take advantage of accelerated depreciation to reduce the overall costs of the system. Because depreciation is an expense, it can be used to offset the taxable income of the taxpayer, in addition to the tax credits that are generated from the solar investment. A taxpayer can receive both a tax credit and a large depreciation deduction in the year the system is placed in service. TCJA AND BONUS DEPRECIATION One of the key highlights of the Tax Cut & Jobs Act (“TCJA”) of 2017 was the increase in the bonus depreciation thresholds to 100% of the qualifying costs in the year an asset is placed into service through December 31, 2022. (After 2022, the bonus depreciation benefits are scheduled to decrease 20% per year through December 31, 2026.) Under the bonus depreciation rules for solar PV systems, the basis in the PV system must be reduced by 50% of the ITC to arrive at the depreciable basis for bonus purposes. For example, a $1,000,000 PV system with a 30% ITC would have $850,000 available as a bonus depreciation deduction ($1,000,000 – ($300,000 x 50%) = $850,000).