Solar Energy Tax Credit: An In Depth Analysis
The Tax Cuts and Jobs Act of 2017 significantly reformed the solar energy industry in the U.S. The changes reduced the corporate tax rate from 35% to 19% and increased the size of the credit for solar electricity generation from 33% to the current 50%. These changes took effect on January 1, 2018.
The Act also doubled the purchase of solar equipment through Dec. 31, 2030, with two new solar efficiency standards—25% and 28%—introduced. Finally, the Act extended the tax credit in an effort to continue attracting more investors to the industry.
The Act made four key changes that could affect the credit:
- It decreased the credit amount for utility-scale solar projects from 80% to 75% of the total project cost, with a phase-out at $22.9 million.
- It decreased the credit amount for small-scale solar projects (up to 20 kW) from 100% to 90% of the total project cost, with a phase-out at $5.9 million.
- It decreased the credit amount on class 2 and 3 solar cells from 90% to 75% of the total project cost, with a phase-out at $16.2 million.
- It increased the credit amount on class 4 and 5 solar cells from 75% to 100% of the total project cost, with a phase-out at $13.1 million.
The Act also added a new application process for solar energy projects to the Energy Savings Performance Contracts Program. The new program allows owners of commercial facilities, like office buildings or shopping malls, to save energy and money through the use of renewable energy sources.
These changes could combine to make the solar energy industry a less attractive investment. Further, the Act ended tax exemption for solar installations (including cell modules and panels) purchased for resale, further decreasing the demand for solar energy products. However, it is important to note that the Act also doubled the solar energy purchase credit, so there is still a lot of incentive for consumers and businesses to go solar.
What This Means For Importers And Manufacturers
For companies that purchase solar equipment (including cells, modules, and panels) on behalf of others, the changes could be disruptive. Up until now, those companies have been able to sell their product at a substantial discount since they were not subject to the 35% corporate income tax. Now that the cost of solar energy products is more reflective of their true value, companies could find themselves spending more to purchase and install solar equipment, especially if they are purchasing larger amounts.
Further, those companies that manufactured solar equipment in China before the Act, largely due to the substantial discounts available, could find that their models no longer make financial sense for the industry. The new tax structure will reduce the demand for solar energy products and could even cause some companies to go out of business.
The Impact On Global Warming: A Good Or Bad Thing?
On one hand, the changes could cause an increase in global warming, as more energy-intensive production processes are required to make up for the decreased demand. In this case, the changes could negatively affect climate change.
On the other hand, if distributed generation and electric vehicles take off as expected, and the changes made by the Tax Cuts and Jobs Act inspire more people to go solar, then the increased demand for solar energy could actually cause significant global warming benefits.
A new report from the Global Warming Policy Foundation (GWPF) analyzed the effect that replacing traditional energy sources with solar power has on climate change. According to the GWPF, if only a small fraction of today’s power generation were replaced with solar power, it would reduce global warming by 1.75 gigatons of carbon dioxide over the next century.
Further, the GWPF reports that the cost of solar power has fallen so much that it is now the cost-effective option for many energy consumers, even those in fossil fuel-reliant regions like the U.S. In some parts of the U.S., like the Desert Southwest, solar power is now cheaper than the electricity consumed by many homeowners and businesses. The report also notes that solar power is now cheaper than the fuel cost of operating a traditional power plant. In some regions, solar power is even competitive with the cost of traditional forms of energy, such as coal and nuclear power.
How To Minimize The Damage: The Key To A Successful Transition?
So, how can industry leaders, investors, and policy makers navigate this significant transformation? By understanding the trends, opportunities, and pitfalls that arise from reduced demand for solar energy products, and taking proactive steps to ensure that their businesses are prepared for this new scenario.
From an industry perspective, the single most important thing that the Tax Cuts and Jobs Act of 2017 did was change the way solar energy products are valued for tax purposes. This provides a critical roadmap for those seeking to invest in or operate a solar energy installation. Further, those seeking to adopt solar energy for their businesses should also consider how the changes made by the Act could impact their bottom line.
However, on the plus side, those that choose to go solar now have an excellent opportunity to profit and even save money through the new tax credit structure.
So, what do you think about the changes made by the Tax Cuts and Jobs Act of 2017? Let us know your thoughts in the comments below!