Every business owner wants to cut costs, but wouldn’t it be great if they could also improve the environment. In addition to energy savings, there are some great tax incentives for converting your energy source to solar. Loan programs are also available to help businesses make this change.
The Federal Investment Tax Credit (FITC) is the greatest incentive. The owner of a solar energy property can claim this credit in the year that the solar efficient project is placed in service. The credit ranges from 30% and then slowly phases down to 10% through 2022 (and will thereafter be a permanent 10% credit) Owners are also eligible to take bonus depreciation on the solar equipment in the year that it is placed in service. The basis of the equipment must be reduced by 50% of the Investment Tax Credit prior to taking the bonus depreciation, but it allows the taxpayer to utilize both incentives. With the 2017 Tax reform act bonus depreciation was increased to 100%, this means business could write off the entire cost of the solar equipment.
In addition to the FITC and bonus depreciation, some other tax incentives related to solar energy are also available. This may include a property tax exemption for certain solar systems installed on real estate structures, property tax credits in certain counties in Maryland, a sales tax exemption, and state grants for installation of solar photovoltaic technology.
Solar energy projects have some great tax benefits, but if you don’t have the cash to invest in solar energy, you won’t be able to take advantage of those benefits. There are multiple different financing options in place to encourage solar projects.
Third-party financing is one of the most common types of financing options for solar energy projects. There are two different types of third-party financing – PPA or leasing. PPA allows you to pay one fixed rate for electricity, which is beneficial in providing price certainty and protection from utility price changes. Leasing is another way to pay a pre-determined payment for the use of the solar equipment.
If you’re interested in actually owning the solar energy equipment instead of leasing from a third party, there are special Qualified Energy Conservation Bonds that can be used to cover the cost of new solar energy through a special program called MD SAVES Green Community Program. This program provides a direct pay credit subsidiary from the US Treasury to offset interest costs and reduces the effective borrowing rate. Historically, this credit subsidy has been about 3%. This allows for 100% funding to private projects but is not subject to the 30% private activity limitation.
Another special financing option is through the Property Accessed Clean Energy program, which allows businesses to fund their clean energy projects through their property taxes. Over 12 counties in Maryland are now offering the PACE opportunity, but it only applies to commercial buildings or multi-family dwellings, not single family homes or government subsidized housing. PACE authorizes different counties to work with capital providers to provide upfront financing for the solar energy projects, and then they collect the repayment through annual or semi-annual charges on the property tax bill. This program is especially interesting because it requires no personal or corporate guarantee for the debt, and it also prevents the solar projects from competing with the core business for capital, and the debt obligation travels with the property, so if the property is sold, the new owner will assume the debt.
Solar energy projects sound intriguing with special tax credits and special financing options, and if this is something that interests you or will be beneficial to your business, you surely want to know where to begin. Next steps in the solar energy process would be to set goals for your business and find out what exactly you’d like to achieve with solar energy. Then determine who would help organize the project and lead it. Finally, be sure to talk with contractors, consultants, and your CPA to help you gather the necessary data and determine what would be the best type of solar energy project for your business and how the project can help you financially and economically. If you are considering a solar energy project please contact your MKSH tax advisor for more information.
Article contributed by Kate Hutton, CPA
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.