Solar energy is a natural, clean renewable energy source that offers both cost savings and security for businesses. It can reduce electric bills substantially while providing a stable and affordable source of energy for the business. Many businesses are moving more and more towards environmentally friendly solutions to meet their building and energy needs. For these businesses, solar energy may not only be an attractive “green” alternative to reduce their environmental footprint, but a tax savings opportunity as well. The installation of an efficient, clean, energy producing renewable energy system now could mean both lower electric bills and tax savings in the future.
Federal Tax Incentives
In order to encourage the use of renewable energy, including solar energy, the United States federal government has instituted the federal energy investment tax credit program. Under this program, an investment tax credit for installing solar energy systems is available in the amount of 30% of the cost of those systems. There is no cap on the amount of qualifying costs or the amount of the credit available to individual property owners. It includes not only the solar equipment, but the cost of installation as well. The credit is available to qualified commercial property owners through 2016 and if the credit cannot be fully utilized in the year the system is installed, it may be carried forward for five years or until 2016.
The federal energy investment tax credit program is a key component in the government’s initiative to promote the use of solar energy in the United States. Businesses can benefit from this initiative now more than ever before. The cost of electricity is always rising, but the cost of solar systems has been dropping and the incentives have never been higher. Now may be the best time yet for businesses to “go green” while also cutting operating costs, hedging against rising energy prices, increasing the resale value of real estate, and creating a new stream of revenue – all at the same time.
Systems eligible for the federal energy investment tax credit include those solar systems that generate electricity to heat, cool or provide lighting to illuminate the inside of a structure. The original use of the equipment must begin with the taxpayer. All applicable design, performance, and quality standards in effect at the time the equipment is acquired must be met in order to qualify for the credit. Federal incentives don’t end there, though. In addition to the federal energy investment tax credit, there is a deduction available for the first year the equipment is put into service in the amount of 50% of the cost of the equipment. This deduction is available under the existing Bonus Depreciation Rules. The remaining cost may be depreciated over the next four years.
Massachusetts Tax Incentives
Massachusetts has an aggressive renewable energy program which requires electricity providers to obtain increasing amounts of the electricity consumed in the state each year from solar sources. This gives rise to the need for providers to purchase renewable energy credits from outside sources. That means businesses that generate solar power have the very real opportunity to generate an incremental revenue stream by selling energy credits for excess power generated by their solar systems. This technique further reduces the cost of energy for Massachusetts businesses.
Corporate Taxes – Massachusetts allowsbusinesses to deduct the cost paid or incurred from the installation of qualified solar systems from net income for state excise tax purposes when certain criteria have been met. Furthermore, solar systems that qualify for the deduction from net income will not be taxed under the tangible property measure of the state’s corporate excise tax for the length of the equipment’s depreciation period. This means, a qualifying property owner may not pay any Massachusetts excise tax on the new solar system for up to five years.
Local Property Taxes – The value added to taxable property as a result of installing a qualifying solar system will be exempt from local property taxes for a period of 20 years.
Sales Tax Exemption – Solar system equipment and materials are exempt from sales tax in Massachusetts.
The following is an example to illustrate the potential tax savings for a Massachusetts S-Corporation:
| Cost of System | $300,000 |
| Federal Energy Tax Credit 30% | (90,000) |
| Cost of System After Tax Credit | $210,000 |
| Other Potential Tax Savings: | |
| Federal Tax Savings on Bonus Depreciation for Owners in the 39.6% Tax Bracket ($300,000 cost less 50% of investment tax credit of $90,000 = 255,000 depreciable base * 50% bonus depreciation = $127,500 X 39.6%) | (50,490) |
| Massachusetts S-Corp. Income Tax Savings ($300,000 X 2.75%) | (8,250) |
| Massachusetts Corporate Excise Tax Savings ($300,000 X .0026%) | (780) |
| Massachusetts Tax Savings for Owners ($300,000 X 5.25%) | (15,750) |
| Total Potential Tax Savings | $75,270 |
| Cost of System in Year 1 Less All Potential Savings | $134,730 |
In Massachusetts, solar system equipment and materials are exempt from sales tax, an additional potential savings in the example above equal to $18,750 (system cost of $300,000 X MA Sales Tax Rate of 6.25%).
Assuming a savings on utility costs plus revenue generated from the sale of renewable energy credits of $10,000 to $15,000 per year, the remaining cost could be fully recovered in approximately 7 – 10 years.
Different states have different rules and may offer fewer or greater tax incentives than in the example above.
If you would like more information on this topic, please contact Maureen Burns Fradera at mburns@downeycocpa.com or 800-849-6022.
