Solar: The Investment
A solar system on your roof pays for itself by lowering your electric and heating bills. It also keeps dollars formerly spent on imported fuel in the local economy, creates well paying jobs and reduces your carbon footprint. But investing in your own solar system is not the only way to make a solar investment. You can also invest as a commercial third party investor, financing, for example, the installation of a solar system on a municipal or non-profit-owned building, taking advantage of the IRS’ Modified Accelerated Cost Recovery System (MACRS).
In force since 1986, MACRS is used to recover the up-front costs of most tangible business assets by means of annual tax deductions based on depreciating those assets. All qualifying commercial solar assets fully depreciate within five years. This makes it feasible for a third party investor to take advantage of the tax credits unavailable to a tax-exempt entity and a building owner to acquire a solar system at no up-front cost.
A contract is executed. The investor retains ownership of the solar system, charging an agreed-upon amount per kWh for the power generated over the term of the agreement (usually 20 years). After the solar system’s full depreciation, i.e. 7 years, the tax-exempt entity may purchase the solar system for its residual value. Alternatively it may choose to continue to pay for the power generated over the remainder of 20 years and purchase the system for $1 at the end of the term. (Note that solar PV systems have a record of operating at or near their peak capacity for 50 years or more).
MACRS’ schedule to depreciate solar assets, which apply to both federal and state tax returns, is as follows: Year 1: 10 %, Year 2: 32 %, Year 3: 19.2 %, Year 4: 11.52 %, Year 5: 11.52 % and Year 6: 5.76 %. The actual amount tax savings is, of course, based on the investor’s effective tax rate for the year. To calculate the amount, multiply the effective tax rate by the value of the year's depreciation. For example, if the solar asset's depreciation is $5,000 and your effective tax rate is 30 %, the tax deduction is $5,000 x 0.3 = $1,500.
Solar PV investments are also eligible for a 30% federal investment tax credit, based on the full installed cost of a solar system (e.g.: $4,500 for a $15,000 system). If you claim this tax credit, the depreciable amount is reduced by half of the tax credit; bringing the depreciable amount to 85% of the total installed system cost ($12,750 for the $15,000 system). If you do not claim the federal investment tax credit, 100 % of the initial cost is depreciable.
Keep in mind that this 30% tax credit is a temporary one, scheduled to expire on the last day of 2016, unless Congress renews it. Therefore to qualify for the credit, the solar system most be installed and operable by the last day of 2016. Solar investors must act with some urgency, to allow ample time for the installation of the system.