A well-worn expression asserts, “If it sounds too good to be true, it probably is.” Richard Carlson, world renown motivational speaker and author of the best-seller of Don’t Sweat the Small Stuff…and it’s all Small Stuff, had this to say on the topic: “The old adage, ‘If it sounds too good to be true, it probably is’ isn’t always correct. In fact, the suspicion, cynicism, and doubt that are inherent in this belief can and does keep people from taking advantage of excellent opportunities.”
Commercial solar development is one such opportunity. No doubt when I tell analysts, reporters and potential investors that commercial solar returns nearly 100% of invested equity in the first year, the proposition is met with the same “suspicion, cynicism and doubt” that Carlson had in mind. But the math is simple and undeniable. So please take a moment to consider the following table:
A $100 hypothetical commercial solar system is financed with 50% bank debt, requiring $50 of investor equity. The Investment Tax Credit is 30% of the system cost, or $30, and reduces the depreciable basis of the system to $85. 50%, or $42.50, of first year bonus depreciation is allowed, leaving $42.50 of adjusted basis depreciable under 5-year MACRS. First year MACRS deprecation is 20%, or $8.50, resulting in total depreciation allowed of $51.00. Assuming a 39% tax rate, the value of the $51 depreciation deduction is $19.89, and when combined with the $30 investment tax credit, the total first year tax benefit is $49.89, or 99.8% of the $50 equity investment.
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This investor return is in addition to distributable cash flow after debt service and required reserves. It is essentially guaranteed, as it is available regardless of system performance, power purchase agreement terms or host credit. Furthermore, all of these tax benefits are immediately available to reduce the investor’s tax liability. That means that, as we have said before, your next federal income tax estimated payment could instead be invested in commercial solar because your current year tax bill is immediately reduced by 99.8% of the capital you invest.
Oh, and this ignores the impact on state taxes, which are also reduced by the $51 in depreciation deductions. Of course, the state income tax impact will depend on in what state you reside, so we have used the most conservative case here. Residents of states with high income tax rates such as California, New York, New Jersey, Connecticut and Pennsylvania benefit from meaningful reduction in state tax liability as well.
And don’t forget that in addition to being a sound economic investment, commercial solar is also a renewable energy source that reduces carbon emissions not only in the community where the system is installed but across the broader region as well.
So there you have it. The facts are straightforward and the math is simple. Still sound too good to be true? Perhaps, but this is the outcome the Federal government intended in creating incentives for the development of renewable energy technology and systems. Still, we would all do well to remember Mr. Carlson’s perspective on such circumstances. Don’t allow “suspicion, cynicism, and doubt” to get in the way. Instead, rely on information, education and trustworthy partners to guide you to excellent opportunities. You can find our currently available projects here.