Since the Tax Cut and Jobs Act has now been signed into law, you might be wondering what impact it might have on a solar investment. Fortunately, there is a lot of good news!
Solar Investment Tax Credit:
There was no change to the current law regarding the Solar Investment Tax Credit. This credit is available and is valued at 26% of the cost of the solar array for 2020 as part of it's scheduled step back. For projects that commence construction after 2020, the value of the solar credit will decrease. In 2021, it will be 22% of the cost of the system. In 2022 and beyond, it will exist as a 10% credit for businesses only.
MACRS Depreciation and Bonus Depreciation:
Solar is generally depreciated over a 5-year depreciation schedule, which means the cost basis of the equipment can be depreciated (similar to expensing or writing off costs) completely over 5 years. This did not change in the Tax Cut and Jobs Act. However, in recent years, solar property was allowed a “50% bonus depreciation”, which allowed a taxpayer to depreciate 50% of the cost basis in the year the solar array is placed into service, effectively allowing the tax savings from depreciation to be realized sooner. One change in the new tax bill now allows 100% bonus depreciation, so the entire cost basis of a solar array to be depreciated in the year that it is placed into service. This allows taxpayers to accelerate all of the depreciation benefits to the year that the solar array is placed in service! This has an effect almost identical to claiming the section 179 deduction on a purchase that was made.
Depreciation for residential solar arrays is generally not allowed unless it is considered a business expense.
The analysis below is written from the perspective of a business that is taxed as a “pass-through”, meaning that the income taxes are paid at the individual level as profits pass through the entity (such as sole proprietor, LLC, partnership, S Corp), and income tax is not paid at the entity level. A corporation (C Corp) would be treated differently for purposes of income tax. While the items below may not be directly related to a solar investment, they are relevant since they may increase or decrease your tax liability in general.
While the Tax Cut and Jobs Act has been marketed as a huge tax cut and a simplification of the tax code, it seems more accurate to describe it as reducing complexity and tax rate in one area, while increasing the complexity and the tax rate in another. The reduction (or increase) that you will realize on your taxes will largely depend on your specific situation and income level. Here are a few pros and cons you might consider as you look ahead to tax planning in 2018:
Pro: New 20% Deduction for Qualified Business Income
This is a new provision for pass-through businesses that allows a deduction of up to 20% of income. Be aware that this is calculated after your AGI (adjusted gross income), so it will not reduce your AGI, which can affect your eligibility for other tax benefits. Also, I understand this is not allowed to be claimed on your salary or wages when you are self-employed. There are also special restrictions and limitations on this deduction, but we won’t get into those details here.
Offsetting Cons: DPAD repeal and SALT limitation
The Domestic Production Activities Deduction (DPAD) was in place for years, but is repealed with the new tax bill. This provision allowed for a deduction of up to 9% of income, and it was calculated before AGI, potentially improving a taxpayer's eligibility for other tax benefits. Wages or salary from for self-employed taxpayers were also eligible to be reduced by this deduction.
The State and Local Tax deduction is now limited to $10,000 per tax return per year. This not only applies to personal income tax and real estate taxes on a personal residence but also applies to state and local taxes paid for business income and for real estate taxes on property owned by a business.
Pro: Child Tax Credit Increase
The child tax credit will increase to $2,000 per child in 2018, from $1,000 in 2017. Also, the income level where this benefit starts phasing out was increased significantly. However, this only benefits those with children 16 and under in their home.
Offsetting Con: Personal Exemption Eliminated
This exemption allowed a portion of income to be exempted from tax, generally an exemption of around $4,000 per household member.
Another significant change is the change in tax rates and where the brackets fall in relation to income. This generally results in a reduction in taxes owed, but higher-income taxpayers will usually have the most significant benefit from this change. While this analysis only covers a few specific items that were addressed in a large and significant tax bill, hopefully, it helps you to understand some of the changes that are in play. A solar investment is still a great way to take control of your taxes and reduce them significantly while also reducing other costs in your business. As always, this is not to be considered tax advice, and be sure to contact your tax adviser regarding how this impacts your situation.
Do you want to take advantage of the Solar Investment Tax Credit? Contact us for a free estimate.