The demand for environmentally friendly and renewable energy sources is growing, and so is the supply. The impact of the recent solar power boom can be seen in the fact that new solar companies emerge each year, and existing companies are growing in size as more and more people flock to their side.
One of the major impediments to the widespread use of solar energy is the cost of installation. The good news is that the solar energy cost-trimming provisions of the 2017 tax act create a very attractive incentive for homeowners and businesses to install solar energy systems on their properties.
How Does It Work?
Under the new tax law, any qualified property owner can receive a tax credit of 30% of the cost of their installation, up to a maximum of $15,000. Revenue Management, LLC (a property tax consultant) explains:
“The tax credit is an installation tax that reduces your income taxes, and it’s available for any size installation (up to 10 kW). The tax credit is in addition to any federal or state tax benefits you might receive for purchasing renewable energy equipment or installing renewable energy systems.”
In other words, if you’re purchasing a 1 kW solar power system, you’ll receive a 30% tax credit, reducing your total cost of ownership by $4,500 (1 kW x 30% x $15,000 credit limit). That’s a significant savings!
- You’ll want to purchase high-quality panels and other equipment that’s built to last.
- You’ll be helping the environment by using less energy.
- You’ll receive a valuable financial benefit.
What About The Money That Goes Up In Smoke?
“If you run a business that consumes a lot of energy, you may be able to deduct the cost of energy you spend on from your taxable income,” says Jason Anderson, Principal Consultant at Revenue Management. “If you’re running a solar installation company, you may be able to write off the money you spend on materials used in the installation process as long as you meet the requirements of the IRS.”
So, if you’re going into business for yourself, establish what is known as a “Solar Energy Systems” business as part of your overall business plan. Be mindful of what is known as the “materials expense rule” when you’re writing off your costs. You can’t deduct materials used in the process of installing a solar power system unless those materials are purchased specifically for and incorporated into the operation of your business.
What Is The Difference Between A Solar Farm And A Solar Power Plant?
To receive the maximum tax credit of $15,000, you can’t simply install a solar panel on your roof and call it good. You need to have a full solar farm, incorporating various technologies that increase efficiency and output.
“The key differences between a solar farm and a solar power plant are the scale and the usage rate,” says Anderson. “The scale of a solar farm is measured in MW (megawatts), while a solar power plant is measured in kw (kilo-watt) – so a 10 MW solar farm would be considered large, while a 1 kw solar power plant would be considered small.”
“The scale of a solar farm makes a difference in how much you can charge for your energy,” says Anderson. “A 10 MW solar farm can generate more revenue than a 1 kw solar power plant, simply due to the fact that the former is closer to what most people would consider a ‘normal’ size.”
“Another major difference between a solar farm and a solar power plant is in the usage rate,” he continues. “A solar farm is used when connected to the grid, while a solar power plant generates power on-demand when needed. A solar farm operates under what’s known as a ‘grid-connected mode’, while a solar power plant operates under’standby mode’ when it is not connected to the grid.”
“This difference in usage rate makes a big difference in how you’ll want to approach maintenance and upkeep for the two types of installations,” he adds. “A solar farm requires more maintenance due to the fact that it’s connected to the grid and thus more prone to vandalism and accidents.”
On the other hand, a solar power plant can simply be switched on when needed and switched off when not needed, making it much more efficient and eliminating the need for regular maintenance. In other words, your electric bill will be much lower with a solar power plant because it only needs to operate when needed.
So, to recap, a solar farm is used when connected to the grid, while a solar power plant generates power on-demand when needed.
How Do I Calculate My Federal Income Tax?
If you’re wondering how to calculate your federal income tax for the year, you can use what’s known as the “installation cost method” to figure out how much you’ll owe. Under this method, you can claim the value of your solar installation at the time it was installed, as a tax deduction. This value can then be subtracted from your income in order to figure out your taxable income for that year.
Additionally, if you’re an LLC (limited liability company) and you’ve reported any income from the purchase of solar equipment, you may be able to claim a business-related expense on your individual income tax return. This deduction is dependent on the size of your business; if you’re an LLC and your annual revenue is under $50,000, you can claim the entire cost of your solar equipment as a deduction. However, if your annual revenue is $50,000 or more, you can only claim the cost of materials and labor.
My Federal Income Tax Will Be Reduced By How Much?
As discussed above, the amount of tax you’ll pay is lower if you install solar energy. However, determining how much lower is a little more complicated. If you’re wondering how much your federal income tax will be reduced this year by the installation of a solar energy system, use the following formula:
- Add Up Your Total Cost Of Ownership (including the cost of materials and installation)
- For a 1 kW system: (3 x $5,000) + (2 x $4,500)
- For a 10 kW system: (30 x $5,000)
- For a 50 kW system: (75 x $5,000)
- For a 100 kW system: (120 x $5,000)
- x 100 Percent
The above example uses what is known as the “cost-plus method” to calculate how much your federal income tax will be reduced by the installation of a solar energy system. This tax reduction is called the “solar energy tax credit” and can be a very valuable financial resource for anyone who qualifies.
If you have further questions regarding the solar energy tax credit or how to take advantage of it, feel free to contact us.