Whether the policy is sound is a discussion for another day. Today though, it is of fundamental importance that you know how to maximize the tax benefits associated with solar power in order to gain the greatest financial benefit. And that means, you need learn about the recently signed CARES Act that granted U.S. taxpayers a 5-year net operating loss carryback.*
Of common knowledge are the two main tax benefits: the 26% Investment Tax Credit for business, and the Residential Energy Credit for private persons, and the Acceleration of Modified Accelerated Cost-Recovery System. Outside of research labs, the tax credit is the greatest support for solar energy that the federal government has put in place as of yet. When combined with the acceleration of solar’s standard five year depreciation schedule to a single year, it’s possible that a tax efficient solar investor can get back greater than 44% of a project’s costs immediately.
A new tax benefit under the CARES Act
Now, there’s a new tax benefit in town that was signed into law as part of the U.S. stimulus CARES Act (page 73). This new adjustment was brought to CommercialSolarGuy‘s attention by our new CPA partner Casey Gilley. A recent post on his blog shows a breakdown of how to apply this new rule, but here’s a short version we grabbed:
Property owners who complete their solar project in 2020 can deduct nearly the entire cost of the project in 2020 under the favorable 100% bonus depreciation rules. If this creates a net operating loss for 2020, the loss can then be carried back up to 5 years to offset taxable income recognized in prior years.
The greatest value of this new tool is that right now, in our current economic times, there are a lot of businesses that won’t earn taxable profits in 2020. That means these business owners won’t be able to make use of the 44% tax benefits of solar power – and that will adversely affect these people’s perception of your solar power sales pitch. Now however, these individuals can go back to 2015 and adjust their tax returns. If in those years they made a profit, and were taxed on those profits, they’ll get fresh cash in their pockets.
*CommercialSolarGuy is not a financial professional, but he’s been slinging solar panels for greater than a decade, and does hang out with certified financial professionals that give him great insight into the complexities of U.S. tax law like this.