30% Tax Credit and Bonus Depreciation

For owners of solar systems on commercial properties, there are several valuable tax benefits available that can significantly offset the costs. Here’s a breakdown of key tax deductions that can enhance the return on investment for commercial solar installations:

Key Tax Benefits for Solar Projects

Federal Income Tax Credit (ITC)

The Federal Income Tax Credit (ITC) allows solar system owners to reduce their federal tax liability by 30% of the total installation cost through 2032. The credit reduces to 22% in 2033 and further to 10% starting in 2034. This credit directly lowers your tax bill dollar-for-dollar. If the tax credit amount exceeds your tax liability, you can carry the remaining credit forward for up to 20 years. There is an add on incentive as well. Additionally, if your commercial property is owned by a partnership, the tax credits will pass through to partners’ K-1s, allowing each partner to benefit proportionally.

Accelerated Depreciation for Solar Systems

Commercial property owners can also take advantage of accelerated depreciation for solar systems. Under current rules, you have the option to deduct 100% of the system’s cost using bonus depreciation or follow the 5-year Modified Accelerated Cost Recovery System (MACRS). Note that bonus depreciation begins to phase out starting in 2023—allowing 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. However, MACRS remains available for any portions not eligible for bonus depreciation. These deductions, like tax credits, generally flow through to partners’ K-1s, and their value depends on the tax rates of each partner.

State Income Tax Incentives

Beyond federal incentives, many states offer additional tax benefits for solar installations, such as state-level depreciation deductions. These can further improve the financial returns of your solar project. To explore which states provide the most favorable conditions for solar, contact us to learn.

Illustrating the Value of Solar Tax Benefits

Consider a scenario where you own a commercial building of 100,000 square feet that requires a 500 kW solar system. If the system cost is estimated at $2.50 per watt, total System Cost=500,000 watts × 2.50$/watt= $1,250,000, here is a breakdown of the potential first-year tax benefits:

• 30% Federal Income Tax Credit (ITC): $375,000 ($1,250,000 x 30%)
• 100% Bonus Depreciation: $523,560
• Total Cash Value of Year 1 Tax Benefits: $898,560

Calculating Bonus Depreciation

The eligible amount for bonus depreciation is reduced by 50% of the ITC. In this example, the depreciable basis is $1,250,000 minus (50% x $375,000), resulting in $1,062,500. If your blended federal tax rate is 49.3%, the potential cash value of the bonus depreciation deduction is $523,560.

Financing Options for Solar Projects

For qualified borrowers, solar projects can be financed with an initial cash down payment of about 30% of the total cost, while the remaining amount can be covered by debt under various financing structures. A property owner could make a $375,000 down payment in 2023 and potentially receive $898,562.50 in cash by filing their 2024 tax return. This represents a return of approximately 2.40 times the original investment.

When to Claim Your Tax Credits and Depreciation

The tax credits and depreciation deductions for new solar installations can be claimed in the tax year when the system is placed in service. These are reported on IRS Form 3468 as part of your tax filing. The IRS provides safe-harbor rules (IRS Notice 2018-59) to protect the 30% ITC rate if at least 5% of the project costs are incurred or paid by the end of the tax year. However, these rules only ensure the credit rate, not the specific year in which the credit is taken.

For more information on how to leverage these tax benefits and maximize the financial returns on your solar investment, contact us at Commercial-Solar.org. We are here to help you navigate these opportunities.