There are valuable short-term and long-term incentives available for incorporating a solar array in a facility, from significant tax deductions and tax credits to increased energy independence. Because of the current tax environment, we recommend giving strong consideration to the long-term value of the credits over the greater short-term value of the deductions.The federal government offers an Advanced Energy Tax Credit of up to 30 percent of the cost of installing an energy system, and for the time being it can be taken as a cash grant in lieu of a credit. Ohio’s Advanced Energy Fund offers a similar grant worth up to 50 percent of the cost or $200,000. The federal grant/credit is reduced if the owner also accepts certain tax deductions that are available on energy systems.
The deductions are particularly valuable for owners who prioritize short-term cost savings. Recent federal legislation increased the amount of immediate expensing, so that as much as $500,000 per year can be written off from qualifying purchases that total $2 million or less in 2010 and 2011. And a project placed in service by the end of 2010 would be eligible for 50 percent bonus depreciation, thus accelerating the tax savings.
However, with marginal tax rates for individuals set to rise in 2011, it might be wise to delay those deductions. By declining the Section 179 deduction and claiming only normal depreciation this year, an owner will qualify for a larger credit or grant while also being able to claim more depreciation – and thus a larger deduction – in future years, when the tax liability figures to be larger; and the vendor will benefit from lower marginal tax rates on 2010 gross profit. Congress may even renew bonus depreciation for 2011. The solar array is a five-year asset for tax depreciation purposes.
In addition to the long-term tax savings that a solar-energy project can generate, it also reduces the owner’s reliance on public utilities. For that reason, you should consider adding the largest array that your property can reasonably accommodate. A smaller array will cost less – you might be able to fund it completely through incentives, with no out-of-pocket costs – but it may generate less energy than your facility demands, which means you will have to purchase a significant amount of current and future energy from a public utility that may not be able to reduce its rates. If you choose to upgrade your array at a later date, the incentives that are available today might not be available then.
From financing to implementing the energy project, a bit of long-term strategy could mean major long-term savings.