You may have heard that the first major reform of the American tax system in over 30 years passed a few weeks ago, and you might be wondering how it will affect you, as a company interested in investing in solar (either through directly purchase a solar system or leasing one through a Solar Operating Lease or a Power Purchase Agreement (PPA).
Tax incentives are important in solar buying decisions, and the new tax bill will affect some of them, so it’s important that managers know what to expect.
Here are five of the most important changes the tax overhaul made to solar tax incentives that you should know about.
Top 6 Corporate Solar Projects Changes Resulting from the New Tax Bill
1. Corporate Entities will have Additional Capital to Invest
The corporate tax rate dropped from 35% to 21%, which will yield substantial cash tax savings that could be utilized for investment opportunities, such as solar projects. Businesses structured as pass-through entities, such as S-Corps or LLCs, will also see substantially lower tax rates.
2. Full & Immediate Expensing
Businesses will be able to immediately expense the 100% of the cost of solar and energy efficiency projects through the end of 2022; after this point, companies will only be able to expense 80% of project costs a year until 2026, when the new tax system is scheduled to be re-evaluated.
3. Higher After-Tax Returns
The lower corporate tax rate will reduce the tax burden on solar project operating cash flows, resulting in higher after-tax returns for businesses. Also, in many states, the income taxes associated with the receipt of solar incentives will be reduced significantly.
4. Reduced Value of Depreciation Shield
The lower corporate tax rates will, in most cases, decrease the value of cash tax savings attributable to the depreciation expense for solar projects. A corporation that owns a solar system, for example, would receive a smaller depreciation benefit with the new 21% rate versus the previous 35% rate.
5. Investment Tax Credit Maintained
All solar projects installed before 2019 will remain eligible for a dollar-for-dollar reduction in income taxes owed in an amount equal to 30% of the total system cost. After 2019, the 30% level will be progressively decreased. This isn’t a change per se, but it is valuable to know that this benefit will remain intact under the new tax bill.
6. Introduction of New Second-Order Tax Provisions
The Base Erosion Anti-Abuse Tax (BEAT) and other limitations on the deductibility of interest expenses deductions have been introduced, which may influence some specific solar project matters.
Every company is different and, likewise, every solar project is different, but the new tax bill has the potential to make solar a possibility for a lot of companies. Many corporations and pass-through entities will see increases in net cash flow, which gives them the possibility to invest in improvements like solar power. Solar already brings with it significant benefits to businesses, and, overall, the new tax bill seems to have compounded those with even more benefits.
Interested in Solar?
EnergyLink can help you determine if solar is the right investment for your business. We are a certified solar installer and C-PACE developer in many locations across the United States. Contact us or give us a call at (573) 777-4811.