CPAs are swamped trying to make sense of more than 1,000 pages of new tax codes signed into law on Dec. 22, 2017. Fortunately, SDC Energy advisers can focus solely on what the new tax provisions mean for our solar investors. And it’s good news!
Solar Investors Benefit in Three Key Ways
As the sweeping tax legislation raced through Congress, solar enthusiasts keenly followed every twist and turn. Thankfully, this tax overhaul — the first of its scope in more than three decades – offers new benefits for solar investments.
The 2017 Tax Cuts and Jobs Act introduced favorable provisions for solar project financing. Here are the three key things you need to know:
1) There are no changes to the Federal Investment Tax Credit (ITC).
2) Depreciation allowances are expanding.
3) Individual tax rates for upper income levels are going down, and the tax bracket ceiling increases.
Let’s dive into how these affect your solar portfolio.
Federal Tax Credits Keep on Shining
The investment tax credit, or ITC, remains a keystone of solar investing. Thankfully, the new tax law does not touch the existing Section 48 ITC statute.
The existing solar energy phase-out schedule remains the same. From 30% currently, the ITC drops to 26% beginning in 2020; 22% in 2021; leveling out at 10% in 2022. And while the House version of the new law had sought to eliminate the 10% ITC for solar projects after 2028, the finalized version continues the ITC without a sunset provision.
New Depreciation Rules Bring Bigger Benefits Faster
After the ITC, the second most significant advantage of investing in a solar project is being able to depreciate the asset. Many of our clients would like to depreciate their solar equipment in the first year to capture more immediate tax benefits. Previously, they could only take 50% bonus depreciation in the first year and then string out the rest over the next four years. The 50% bonus depreciation was set to reduce to 40% in 2018 and eventually be eliminated over the next few years.
All that has changed. The new tax law offers “immediate depreciation,” which is exactly what it sounds like: You take 100% of your capital expenditure in Year One.
This is a big deal for solar investors. You can deduct the entire cost of qualified property acquired and placed in service before January 1, 2023. (And, by the way, the definition of “qualified property” hasn’t changed). For 2023 and beyond, the immediate deduction phases out 20% each year. In other words, immediate depreciation is limited to 80% in 2023, 60% in 2024 and so on until it is fully phased out in 2027.
Enhanced Section 179 Level Doubles
Enhanced section 179 depreciation is a popular deduction for many of SDC Energy’s clients. Depreciation levels for section 179 have doubled from $500,000 to $1 million and phase-outs that used to start at $2 million instead jump to $2.5 million after December 31, 2017. In addition, these amounts will be indexed for inflation after 2018.
The new law also increases the scope of qualified property to include “qualified real property,” which includes improvements to nonresidential real property after it was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
SDC Energy does not typically run pro-formas for enhanced section 179, so please consult with your tax advisor to see if this depreciation filing is right for you.
Lowered Income Tax Rates Give You More for Less
The new tax law cut rates and increased the income level at which the highest bracket applies so you have more income that falls under lower tax rates.
Under the new act, the largest decrease in tax would potentially go to high-income married couples filing jointly. The maximum tax rate for them drops from 39.6% to 37%, which is one significant benefit. But the old maximum tax rate applied to income over $480,050, while the new, lower rate doesn’t kick in until income reaches $600,000. That gives you even more income to invest in solar!
The Final Word: Solar Projects Retain Their Tax Advantages
Your solar projects remain among the most valuable tools in your tax planning arsenal. Because SDC Energy models your project’s cash rates and pro-formas on a conservative 25% to 30% federal tax rate, you can count on us not to overstate project benefits. And with the new tax laws, those benefits have grown even more.