Growth in Solar is Led by Falling Prices
The cost to install solar has dropped by more than 70% over the last decade, leading the industry to expand into new markets and deploy thousands of systems nationwide.
In the late 1990s and early 2000s, businesses evaluating solar often had difficulty justifying the financial investment due to insufficient payback periods, often between ten and twenty years. The sustainability benefits were a powerful motivator, but financial ROI requirements put PV technology out of reach for many commercial and industrial markets.
Fast forward to today, and the financial returns for businesses going solar are now quite attractive. Costs have come down significantly while legacy incentive programs still exist, leading to simple paybacks that are often less than seven years, and in some cases less than five years. This fact, coupled with reliable systems that produce cheap, green energy for about 30 years, makes now the ideal time to invest in solar.
Federal Tax Credits for Solar Maximized Through 2022
The federal Investment Tax Credit (ITC) gives any business with tax liability a federal tax credit on its solar investment. Currently, the ITC rate is 26% percent. This means that a business investing $100,000 in solar would offset its federal tax bill by $26,000 in the first year alone.
Congress passed an important two-year extension of the ITC at the end of 2020, allowing businesses to receive full ITC benefits on solar projects that enter construction in 2021 or 2022. Immediacy is key, as an aggressive step-down schedule will decrease the ITC to 22% for projects starting construction in 2023. Commercial projects started in 2024 or after will only qualify for a 10% tax credit.
Accelerated Depreciation Increases Solar ROI
In addition to the ITC, another tax policy aiding industrial solar owners is the favorable depreciation treatment provided to solar systems at the federal level. The entire investment can be depreciated in the same year as project completion, sometimes called “bonus depreciation.” This level of tax shelter is in addition to the tax credit mentioned above.
The IRS reduces the basis for depreciation by half of the applicable tax credit amount. By way of example, if the tax credit is 26% (as it is in 2021), and the ITC is claimed, then the depreciable basis would be 87% of the total cost (100% – (26% x ½) = 87%).
Revisiting the previous example of a solar system constructed in 2021 with a pre-ITC project cost of $100,000, the depreciable basis would equal $87,000. Assuming an average federal tax rate of 21% and an average state tax rate of 7%, total depreciation between federal and state tax returns would equal $24,360. Combined with the ITC savings of $26,000, the total cost for the solar system is often reduced by more than half due to total tax shelter from ITC and federal and state savings from bonus depreciation. In addition, many industrial solar customers can also offset a portion of their solar project costs with locally available financial incentives.
Going Solar Results in Significant and Lasting Cost Savings
Arguably the greatest financial motivation for businesses to invest in solar is the long-term cost savings realized over the life of the system. Once a solar PV system is paid off, the electricity generated is nearly free. The significant federal, state, and local financial incentives result in systems being paid off sooner than ever. The time to go solar truly is now.
Interstates provides a customized Solar Feasibility & Financial Analysis that includes project costs, available incentives, and lifetime system production and sustainability metrics. If your business is ready to take a closer look at solar, contact us today.
Jaron Vande Hoef, PE, LEED AP, VP of Client Delivery
This blog was originally published in the Current Connections Winter 2022 issue.