Bench Talk

Inverters, connectors, and panels may be the hardware that delivers solar energy to homeowners and utility giants alike; however, it’s the tax breaks that often justify installing solar energy in the first place. Tax incentives are typically aimed at supporting technologies that may otherwise encounter market-entry barriers. They often yield benefits by supporting job creation, driving innovation, and advancing public policy goals, such as reducing air pollution.

A 2017 report by the Natural Resources Defense Council says that federal tax credits will likely result in the development of nearly 30,000 megawatts of utility-scale wind and solar resources by 2020. That’s enough to power nearly eight million homes.

Tax credits for wind and solar have usually been popular in Congress. When it comes to wind energy, Congress has offered up some cliff-hanging moments. On several occasions in recent years, tax credits for onshore wind have been allowed to lapse, only to be reinstated. This sort of on-again, off-again approach has sometimes made it hard for the wind industry to plan and grow.

But in December 2015, Congress passed multiyear tax credit extensions for both wind and solar.

Under the extensions, tax credits for onshore wind energy are phased out and expire at the end of 2019. Solar credits are phased out, too, but not until after 2021 for residential projects. For utility-scale and commercial solar projects, credits fall from as much as 30 percent to 10 percent of investment costs after 2021.

More recently during the tax reform debate at the end of 2017, Congress considered cutting tax breaks for wind and solar energy. Yet in the end, few substantive changes were made:

• The version of the tax bill that the House of Representatives considered would have ended the 10 percent permanent tax break for commercial and utility-scale solar energy projects that were approved in 2015. The investment tax credit would have ended altogether after 2027.
• A second provision would have changed eligibility rules and made it harder for solar farm investors to claim tax credits in a given year. If it had been implemented, some solar projects would have qualified for tax breaks in later years and only after the value of the tax credit was scheduled to fall.

However, in the end, both the permanent 10 percent tax credit and eligibility criteria remained unchanged in the bill signed on December 22, 2017.

The House version of the tax bill, which “was” under consideration, also would have codified what’s known as the "continuous construction" requirement for determining when project construction begins. Internal Revenue Service (IRS) guidance currently covers this provision, but agency guidance is not as forceful as an Act of Congress. IRS guidance also provides a so-called “safe harbor” for projects that enter service within a certain time once construction starts.

The House bill, which “was” under consideration, left out the safe harbor and would have ended it. The final bill, however, kept the safe harbor intact, allowing developers to continue to use it as they make long-term project plans.

One change that did successfully make it into law involves prepaid power purchase agreements. These agreements are often used in renewable projects, primarily for rooftop solar. In practice, they enable the electricity provider to include advance payments in income over the entire period during which the electricity is delivered. The new tax bill requires that these prepayments be reported immediately as income or, depending on the case, partly in the year of the prepayment and partly in the following year.

Finally, tax planners say that the tax bill’s new headline-grabbing provision of reducing the maximum corporate tax rate to 21 percent could impact renewable energy projects that involve tax equity investors. In a nutshell, the lower tax rate will trim the present value of depreciation tax benefits but will also cut the after-tax costs of income allocations to each partner. The bottom line is that the change could speed up when a renewable energy project is sold.

The 2017 US tax reform could have impacted the solar industry more severely had the House’s new version of the bill prevailed. The most effective tax breaks remained intact, however, enabling the continuance of investment in solar energy projects of all shapes and sizes.