April 30, 2014
On a federal level, there are two primary incentives for solar: the ITC and MACRS depreciation. USDA also has a grant program, which is available to select commercial and agricultural projects.
The ITC (Investment Tax Credit) is equal to 30% of the total project cost, and is available for any entity or individual who is paying taxes. The ITC acts as a credit against income tax, but is not refundable. In other words, the ITC cannot generate a tax refund. Any excess credit from the taxable year of the solar installation can typically be carried forward 20 years, or, in some cases, backward one year. At the end of 2016, the ITC is scheduled to drop from 30% to 10%. While it is unlikely that the 30% ITC will be extended, it is possible that there will be a “safe harbor” provision allowing projects that have begun installation in 2016 to take advantage of the full 30% ITC.
MACRS depreciation is available for solar projects used for business, and can be taken over 5 years, rather than the typical 39 years for business equipment. This depreciation is available for the entire cost of the solar project, minus half of the ITC (typically 15%). This provides a significant benefit for business owners, particularly those in higher tax brackets.
The USDA grant is available for farms and for small businesses located in a rural area. This grant program has limited funding, which can vary significantly year to year, and has an extensive application process. For these reasons, many installers avoid the grant altogether. Paradise Energy is among the most successful installers in the northeast at securing USDA funding for their customers. They have successfully secured more than $1.27 million for 36 projects in 5 states over the past 4 years. While the application process is complicated, the grant can fund up to 25% of total cost for select projects. With the recent passage of the farm bill this year, USDA grant funding should stabilize for the next 5 years.
Similar to Pennsylvania, Ohio’s solar installations have fallen significantly with the SREC market. As with Pennsylvania, Ohio’s SREC prices have recovered slightly and are currently in the range of $55-60 (see SREC section for details).
An SREC (Solar Renewable Energy Certificate) is minted for every MWh (1,000 kWh’s) generated from a solar project. An SREC represents the environmental benefit of solar, and is completely separate from electric savings and other benefits of solar. The value of an SREC varies significantly by state, and is based on the demand for SREC’s within any given state. States with requirements for SREC’s include Pennsylvania, Ohio, Maryland, Delaware, New Jersey, and Massachusetts.
The requirement for SREC’s is based on state law, and typically increases over time. For example, the state of Maryland currently requires 0.35% of the electricity consumed in the state to be produced by solar; by 2020, that requirement is set to increase to 2%. Electricity suppliers that do not meet the requirement are fined at the current SACP (solar alternative compliance payment). To avoid the fine, electricity suppliers buy SREC’s, which provides the demand.
States also vary in requirements of solar project location. Most states, including Maryland, Delaware, New Jersey, and Massachusetts require that SREC’s used in compliance of their individual state laws be produced by solar projects within their state. On the other hand, Pennsylvania accepts SREC’s produced anywhere in the PJM area, while Ohio can accept up to half of their SREC’s from adjacent states. This has helped to cause the lower SREC prices in the states of Pennsylvania and Ohio.
Note: Paradise Energy is not a tax advisor; please consult with your accountant or tax advisor to determine how you can take advantage of tax credits and depreciation for your particular situation.