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This is the last year that businesses are eligible for the 30 percent federal investment tax credit (ITC) for solar—sort of. A few simple steps can position businesses take advantage of the solar ITC before step downs begin next year.
The Tax Benefit Step Down
Tax benefits have motivated sustainable upgrades over the past ten years. The 30 percent ITC was the most popular. The ITC “provides owners of solar systems with the ability to offset tax payments owed to the IRS in an amount equal to 30 percent of the eligible cost basis of a solar photovoltaic system,” summarizes Smart Energy Decisions.
Beginning in 2020, however, the tax benefit will gradually decrease. The first step decline is to 26 percent for projects that “begin construction” in 2020. In 2021, the benefit declines to 22 percent. All projects starting in or after 2022 receive only 10 percent.
“The good news is that there is currently a 30 percent ITC for the cost of the system for those installing solar before December 31st, 2019,” emphasized Ray Segars, CEM, consultant for energy and sustainability on Yardi’s energy team.
He added, “The emphasis is on credit. This is a credit not a tax deduction. Tax deductions reduce taxable income, thus reducing associated taxes. Tax credits are more valuable because they reduce the actual tax bill dollar for dollar.”
Gaining the Advantage on the Solar ITC
Notice 2018-59 details strategies to help corporations navigate the step downs with financial finesse.
Firstly, “beginning construction” is a surprisingly loose term. There are two ways that a project may begin and still qualify for the year’s tax benefit.
- The Physical Work Test entails beginning physical work on your solar project
- The Five Percent Test entails paying or incurring 5 percent or more of the total cost of the solar project
For the latter, a client may make a deal with a solar developer that cannot finish the job in 2019. Perhaps the solar developer may not get the solar panels in time due to a backlog of orders. As long as the client pays for at least 5 percent of the cost, the 30 percent ITC is preserved.
“Actual costs that could be incurred that easily exceed 5 percent of the cost include items such as system design and engineering, site acquisition and array infrastructure,” said Segars.
Projects must also make “continuous progress” and reach completion before 2023. Read Notice 2018-59 for full details.
To reap the greatest return for your solar project, begin planning your project now to receive the 30 percent ITC. Yardi can help you get started.
“Yardi energy analysts and consultants can help clients determine if these economic incentives make a solar system financially beneficial for clients,” said Segars. “Solar systems create many economic and environmental benefits. In addition to the tax credit detailed above, they generate electricity that can offset energy purchased from the grid. They could earn other incentives such as grants and utility rebates. They can also qualify for tax deductions and most importantly they help the environment by reducing greenhouse gasses.”
Contact Yardi to take your first steps towards greater efficiencies, cost savings, and the 30 percent ITC.
