Is the Juice Worth the Squeeze - Tax Considerations for Your Photovoltaic (PV) Retrofit
By: Patricia Tuite, Managing Director, The Empyrean Group
Hanan Fishman, President, Alencon Systems
If you’re the owner of a PV plant that’s now a few years old, perhaps even one built under the Federal Government’s 1603 program that expired in 2012, you might be looking at investing in repowering your plant via retrofits of some sort to increase the amount of power your plant is generating. Retrofits can be a great way to squeeze more production out of your PV plant.
Of course, in making such a decision, you’ll need to determine if the juice is worth the squeeze.
There can be a variety of economic factors you’ll want to consider in undertaking a repowering or retrofit exercise of a PV plant, including such factors as the value of the increased production relative to the cost of the retrofit, both in terms of the additional energy you can sell as part of your Power Purchase Agreement (PPA) as well as additional incentives you can create for yourself such as additional Solar Renewable Energy Credits (SREC) revenue.
Like a new plant investment, tax benefits also factor into the retrofit financial calculations. However, unlike a new plant investment, the rules for tax deductibility can be a little trickier to navigate. That’s why here at Alencon, we’ve partnered with The Empyrean Group and their PV tax experts to help you find your way.
In looking at a PV retrofit, unfortunately, under the tax code as currently written, you won’t be able to use the Section 179 deduction since equipment installed would be considered “Energy Property.” Such assets fall under excepted property according to the tax code, i.e. they do not qualify for Section 179 treatment. So, that’s the bad news. Click here to learn more about this provision. You can also learn more about the benefits of Section 179 by clicking here.
The good news is such investments will qualify for “Bonus Depreciation”, which will allow you to take 50% of the investment in PV retrofit assets as a deduction in the year you put them into service. Assuming a 35% effective tax rate, that nets out to 17.5% discount in the first year. The balance of the cost basis could be depreciated as 5-year Modified Accelerated Cost Recovery System (MACRS) assets.
That brings us to the last and least straightforward aspect of investing in a PV plant retrofit, using the investment Tax Credit (ITC). Nationally, the ITC offers a 30% tax credit for investment in PV assets. What’s tricky here is if this can apply to retrofits. The short answer is: Maybe. When considering a retrofit with respect to the ITC, something called the 80-20 rule applies. This rule states that if the cost of the retrofit is 80% or higher of the value of the existing equipment plus the cost of the new equipment, the plant qualifies as originally placed in-services and you can claim the ITC for a retrofit. Determining the value of the retrofit is quite straightforward, it is just the installed cost of the retrofit. The catch here is determining the value of plant. That’s where the professionals at The Empyrean Group can help. Making this determination does require a bit of analysis.
Whether your plant qualifies for the ITC or not, the additional tax benefits created through MACRS depreciation and Bonus Depreciation alone can significantly improve the return on investment of a retrofit to your PV plant.