You can never truly predict what legislation will actually pass through Congress and get signed by the President. Nevertheless, there are several expiring solar tax benefits in the EXPIRE Act of 2014 that we hope will get extended and continue to benefit commercial solar installations.
The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act is a U.S. Senate bill that is meant to extend a slew of tax incentives for one last time, hence the purposeful “EXPIRE” acronym.
In terms of solar, there are three key pieces of expiring legislation that may or may not make it to the President’s desk:
30% Federal Investment Tax Credit Extension…or not
First, the bad news: As currently written, EXPIRE does not include extending the 30% solar investment tax credit (solar ITC). This very popular incentive allows tax paying solar owners to receive a federal tax credit that can be used to offset a commercial solar system’s cost by as much as 30%.
While the solar ITC extension did not make it into EXPIRE, it may be included in future omnibus bills. As of right now, only solar projects completed by the end of 2016 will qualify for the 30% ITC. Senate supporters have been attempting to change the wording so that any solar project that is started by the end of 2016 will qualify for the 30% ITC credit. If successful, this “commence construction” wording could allow solar owners and developers to qualify for the 30% tax credit for complex projects that may not finish completion before the end of 2016.
On the other hand, if the ITC law isn’t amended before 2016, the ITC will be reduced to 10% for solar projects that complete or start installation after December 31, 2016. Consequently, it’s important for large solar projects to begin construction as soon as possible to ensure beating the current 2016 deadline.
Section 179 Deduction Expense
The EXPIRE Act does include several provisions that improve the Section 179 deduction. From 2009-2013, the Section 179 deduction allowed eligible businesses to deduct up to $500,000 of a solar equipment purchase price of up to $2 million, from the taxpayers’ gross income in the first year. This additional tax deduction is on top of the 5 year accelerated depreciation schedule, allowing taxpayers to write off a significant portion their investment in the first year. Some industry observers have referred to this provision as “super-secret 100% depreciation.”
If EXPIRE doesn’t get signed into law, for taxable years beginning in 2014 and thereafter, a taxpayer may only expense up to $25,000 of the cost of the solar property, up to a maximum $200,000 of the solar equipment’s price tag. These limitations, currently in place, significantly impact the benefit of this tax deduction.
However, if the EXPIRE Act is ultimately signed into law (as currently written by the Senate), it will do several things: First, through 2015, it will restore the maximum annual deduction amount and equipment cost phase-out threshold to $500,000 and $2 million, respectively.
Second, EXPIRE will allow tribal governments and non-profits to allocate the value of the 179 deduction to “the person primarily responsible for designing the property in the same manner as is allowed for public property.” In other words, a tribal government or non-profit can’t typically benefit form tax deductions, but under this provision, a non profit going solar will be able to transfer the equivalent 179 deduction value to a solar installer, who can deduct that value from the total cost.
That being said, non-profits may be more inclined to finance their solar installations with solar PPA financing and other new innovative financing methods. (Contact REC Solar for comparing the best options for non-profits.)
If EXPIRE is signed into law, one provision will also extend the 50% Bonus Depreciation provision for solar property purchased, installed, and connected to the grid by the end of 2015.
Under Bonus Depreciation, the taxpayer is able to deduct an additional 50% in the first year of the installation. There are no eligibility or project limits under this provision, opening this tax benefit up to all tax payers. So if a business is too large to qualify for section 179, they can still take the bonus depreciation and 5 year accelerated depreciation schedule creating a healthy reduction of their tax burden.
When the tax credit is used with a solar project, , the owner must reduce the project’s depreciable basis by one-half the value of the ITC. So, this means the owner is able to deduct 85% of the tax basis with the ITC (30% ITC x ½ = 15% reduction in eligible basis).
As a very simple example, if EXPIRE passes and a solar installation’s tax depreciation cost basis after applying the ITC is $650,000, an eligible taxpayer could deduct up to $500,000 in the first year under section 179.
The remaining cost, $150,000, would be subject to the 50% Bonus Depreciation. Thus, the taxpayer would receive an additional $75,000 bonus tax deduction in the first year, resulting in significant tax savings, a reduction in the payback period, and a nice boost to the Return On Investment for a solar project…if EXPIRE makes it to the President’s desk.
The above notwithstanding, the U.S. tax code is very complicated and this is not official tax advice. For the sake of brevity, we’ve simplified explaining these potential solar incentive extensions, so please contact REC Solar for more details about how these proposed solar incentives and other financing options might apply to your solar project.