For a number of years, certain Federal, state and local tax incentives have been available to promote, among other things, the importance of renewable energy like solar power. These incentives benefit Florida’s business owners and residents who choose to implement solar energy systems on their property. Although this article focuses on opportunities for solar power, similar or comparable incentives are available for other forms of renewable energy, such as wind and biofuels.
Federal Tax Incentives
Code § 48(a) provides for an energy credit, commonly known as the “investment tax credit”, equal to thirty percent (30%) of the cost basis of qualifying energy property placed in service during a taxable year, the construction of which begins before January 1, 2024. For these purposes, “energy property” means equipment using solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, but not with regard to heating a swimming pool. Additionally, such property must be depreciable, with an estimated useful life of at least three (3) years. Beginning with any property on which construction of which begins after December 31, 2019, there is a phase-out of this credit. Accordingly, the percentage which applies in 2021 for construction begun prior to January 1, 2023 is 26% and the 2023 construction percentage will be phased down again to 22%, creating an incentive not to wait to convert. Lastly, if the energy property is not placed in service before January 1, 2026, the credit is limited to ten percent (10%). The IRS issued guidance providing that investing at least five percent (5%) of the total expected installation cost will constitute “beginning construction.” This puts solar energy on par with other renewable energy sources.
Beyond the credit, qualifying depreciable renewable energy property receives an additional benefit from accelerated and bonus depreciation. Code § 168(e)(3)(B)(vi) provides that most solar energy property is five-year property, which qualifies under Code § 168(k) for bonus depreciation. The practical effect of this is enormous as currently one hundred percent (100%) of the cost of qualified energy property (reduced first by fifty percent (50%) of the Investment Tax Credit taken, if applicable) is immediately deductible in the year it is placed in service. This rule applies until the end of 2022, after which the percentage immediately deductible decreases by twenty (20) percentage points annually until completely phased out at the beginning of the 2027 tax year.
Together, the investment tax credit and the depreciation benefits allow a significant portion of the cost of investing in solar energy to be essentially paid for by federal tax incentives.
For example, assume a taxpayer installed a solar energy system in 2021 with a cost basis of $100,000. In 2021, the taxpayer qualifies for the investment tax credit of 26% of that basis of $26,000. The taxpayer also qualifies for bonus depreciation of 100% of the cost, reduced by 50% of the investment tax credit taken, or in this case $87,000.
State Tax Incentives
The Florida property tax exemption available for solar energy systems (and other renewable energy source devices – including wind energy and geothermal energy) was expanded effective January 1, 2018. The exclusion is extended to 80% of the assessed value of such systems installed on or after January 1, 2018 for nonresidential properties. Eligible solar energy source devices include portions of the system up to the point of interconnection to an electric utility’s distribution grid or transmission lines. These changes to the law are scheduled to expire at the end of 2037. New regulations governing the terms of contracts for the sale or lease of solar energy systems, including numerous required disclosures, became effective July 1, 2017.
Additionally, Florida has a corporate income tax credit for solar energy generation in the amount of $0.01 per each kilowatt-hour of electricity produced. Historically, the legislature has funded the program at $10 million per year; however, the program was not funded for the state fiscal year which began July 1, 2019.
It is important to be mindful of the fact that many of the incentives contained in this article have time limitations making early participation potentially more advantageous due to phase outs or limited availability. Contact your tax advisor to take advantage of these opportunities.