The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

SEIA Sheds Light on Tax Treatment of Solar Financing

There has been a lot of dialogue about the future of solar financing and the tax treatment of various solar financing scenarios, and we at the Solar Energy Industries Association hope to contribute additional clarity to that discussion. As an industry we must remain mindful of the applicable tax laws, statutory and regulatory requirements that govern key solar incentive programs such as the Section 48 commercial solar investment tax credit ("ITC") and the Section 1603 Treasury Program ("1603").

The tax rules that govern equipment financing are not new, but they may not be familiar to everyone in the solar industry. Equipment leases and similar instruments account for approximately $628 billion of business each year — more than half of all U.S. business investment in capital goods and software — but they are still relatively new to the solar rooftop market.

Tax Equity

Most solar developers can’t fully use the tax benefits provided to solar projects, and often barter them to institutional buyers in return for capital investment — called “tax equity” — which they can then use to cover the capital cost of their projects. The tax equity investor can claim a tax credit for 30 percent of the purchase price it pays for the system. In many instances, basis for the ITC or 1603 award is calculated on what the IRS terms the fair market value of the project. Tax equity investors usually insist that the fair market value be confirmed by an independent appraisal, and an appraisal is required under 1603.

Fair Market Value

The IRS recognizes three approaches for determining the fair market value of an asset regardless of asset type: (1) income (2) market and (3) cost. The IRS applies these approaches across a broad set of property categories.

  • The income approach assigns a value to a project based on the income generated by the asset. (In the case of a solar project that has been leased to a customer or is subject to a PPA to sell the electricity to a customer, the value would take into account the total lease or PPA payments provided per the contract, along with any other tax and cash incentives that will be received by the owner, each discounted to reflect net present value of such items.) The income approach is commonly used in valuing rental properties.
  • The market approach analyzes recent sales of comparable projects — like Kelley Blue Book, to borrow an example — and analyzes their differences to arrive at an adjusted value.
  • The cost approach would normally be used for new assets that someone has built himself and for which there is no comparable sales data.  It basically looks at the costs of building the project and adds a profit margin. The underlying assumption is that a buyer would pay no more for the property than the cost of producing another identical property.  

In the context of the 1603 program, the Treasury Department has indicated in public guidance that it favors a cost approach to determining fair market value, but this is not a hard-and-fast rule. The Treasury Department provided its only public guidance on solar fair market values in July 2011, indicating that $7/DC watt for residential projects under 10 kW, and $4/DC watt for systems larger than one megawatt should be used as the benchmarks at that time.  According to SEIA’s Solar Market Insight, system costs have decreased significantly in the last year, so companies should check with Treasury officials to get their latest guidance.

Regardless of the financial structure used, studies have suggested the government gets back more than the amount of the tax credit or Treasury cash grant in cases where solar systems are leased or the electricity is sold under a PPA.  The government collects income taxes on the rents or electricity payments, unlike where systems are owned by customers directly. 

The ITC is the most significant financial incentive available to the industry to continue to work toward parity with polluting power sources. Equipment financing has leveraged the ITC to bring billions of dollars in private investment to solar, and make it accessible to more types of customers. The tax rules that govern equipment financing have been in place for decades, and it’s absolutely crucial that we continue to comply with them as an industry.

SEIA is hosting a webinar on Wednesday, September 5, 2012, at 1:00 p.m. ET where leading tax experts will provide an overview of the compliance rules that govern these key programs. Greentech Media has graciously allowed us to post a primer for that discussion here, and registration is available for free for any company in the solar industry at the following link. We hope you can join us. 

Untitled Document

RELATED ARTICLES

Sunrise in Pakistan as the Country Delves into Solar PV

Robert Harker Pakistan has joined the list of countries that are exploring solar power as a means to bridge critical energy generat...

Global Renewable Energy Roundup: China, Kenya, Turkey, India Seeking More Renewables

Bloomberg News Editors China is being encouraged by three industry groups to double the nation’s solar-power goal for 2020 to make up for sh...

Why Smarter Grids Demand Smarter Communications Networks

Mark Madden

Historically, utility networks and communications networks have had little in common.

The Importance of “Switching Costs” to the US Residential Solar Industry

Paula Mints The DoE and numerous organizations and governments globally are focused on driving down the cost of solar convinced t...

PRESS RELEASES

Canadian Solar Announces Partnership in 200 MW Tranquility Solar Power Project

Recurrent Energy signed an agreement with Southern Power to partner on the Tranquility ...

AWS Truepower Announces Major Expansion of its Due Diligence Team in Response to Growing Market Demand

AWS Truepower, an international leader in wind and solar energy consulting and engineer...

20 days to GRC Annual Meeting & GEA Geothermal Energy Expo

The Geothermal Resources Council (GRC) has announced that it is only 20 days to go to t...

Array Technologies’ DuraTrack HZ v3 Continues to (R)evolutionize at SPI

Array Technologies, Inc. (ATI) prepares to showcase its recently launched tracking syst...

FEATURED BLOGS

Solar Energy Means Jobs, Savings, and a Low-Cost Future [infographic]

There are a lot of utility-sponsored legislative and regulatory attacks on solar energy lately, and we put together t...

Get In The Groove

When we talk about strategies for boosting productivity, we often overlook the fact certain projects lend themselves ...

How To Get People To Do Stuff

It’s no secret that psychology and sales go hand in hand. If you understand the principles of human psychology ...

Transitioning to Net-Zero Living

Judith and Jeffrey adore living in Belfast, Maine – a quaint harbor town of Belfast, Maine. They previously res...

FINANCIAL NEWS

Rhone Resch is the President and CEO of the Solar Energy Industries Association (SEIA), the national trade association for the solar energy industry representing over 1,000 companies that manufacture, develop and install solar systems of all sizes...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 4
1507REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @jennrunyon

FEATURED PARTNERS



EVENTS

Intersolar South America 2015

Exhibition and Conference: September 1-3, 2015 Intersolar South America ...

Intersolar Europe 2016

Exhibition: June 22-24, 2016; Conference: June 21-22, 2016 Intersolar Eu...

Intersolar India 2015

Exhibition and Conference: November 18-20, 2015 Intersolar India 2015 I...

COMPANY BLOGS

Less Is More

When you’re giving a presentation, one of the easiest things to do...

Captivology

One of the biggest challenges we face as efficiency sales professionals ...

How To Optimize Your Meeting Schedule

Do you spend more time in meetings than you do actually working? While m...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS