Renewable Energy and Their Tax Advantages
Updated: Nov 13
Renewable energy has become a key area of interest for investors. This has had the effect of increasing both public and private investment capital. Renewable energy economics are largely dependent on tax incentives called either Production Tax Credits (PTCs) or Investment Tax Credits in parentheses (ITCs).
The “IRA” or Inflation Reduction Act of 2022 has significantly affected the renewable energy sector by enhancing the various tax incentives for investors.
ITC's allow an investor to deduct a percentage of the qualified energy project costs from their federal taxes. PTC's are based on a per kilowatt- hour price for electricity which will be produced by the project in the first ten years.
Additionally, not only is a taxpayer able to receive tax incentives from new projects but the redevelopment of existing renewable projects utilizing current technology which enables an increase in efficiency reliability and extended useful life are also eligible for tax incentives.
By way of example, assume an investor purchases a solar project for $1 million.
· The $1 million is entitled to a 26% or $260,000 immediate tax credit. This credit can be taken over the next 20 years if needed.
· Additionally, the 1,000,000 is entitled to an 87% depreciation equaling $870,000. Assuming a 37% federal tax bracket without consideration for possible state tax rates, the investor would receive an additional $321,900 in credit.
· In essence the $1 million investment is worth $581,000 in various tax credits which is more than half of the investment. This is before we even start discussing the cash flow.
Utilities usually have Purchase Power Agreements (PPA) with their producers. On average these contracts last between 20 and 25 years thus providing an income stream for the project when production begins. The investor little typically receives between 4 and 6% of the annual return. After accounting for the various tax benefits the return on investment can well exceed 10%. If the investor were to leverage the purchase with qualifying debt, then the rate of return could be even greater. Please bear in mind, these are estimates and naturally each solar project stands on its own.
If you would like to learn more about how this new tax advantaged profit center works, please contact me at: