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Tax incentives of solar power arrays explained

Can installing solar power systems help you at tax time?

Forrest Laws

May 13, 2020

Can installing solar power systems help you at tax time or are they just an alternate energy source that can reduce your utility bills if conventional electric power rates continue to rise?

The answer to that question: “It depends,” says John Sawyer, CEO of Stone Creek Solar in Jonesboro, Ark., and a speaker at the Arkansas Soil and Water Education Conference at Arkansas State University.

“I’m a contractor — I’d rather be pile driving in the mud,” said Sawyer. “I’m not an accountant. Consult your CPA just like Tim said to confirm that this contractor isn’t feeding you something that doesn’t jive with your tax return. (Producer Tim Covington of Jonesboro, Ark., spoke prior to Sawyer at the conference.)

Sawyer gave an example of a farmer who uses 1 million kilowatt-hours of electricity per year. If the rate for power at his local utility is 8 cents per kilowatt-hour that means he spends roughly $80,000 for electricity annually.

“Over the next 10 years if energy costs do not increase — and the trends show that they more than likely will — the farmer will spend $800,000 if he continues to use 1 million kilowatt-hours,” said Sawyer. “The expense could be higher if rates continue to go up.”

A solar power contractor could approach the farmer to build a 600 kilowatt-hour system for about $1 million. A 600-kilowatt system produces about 1 million kilowatt-hours per year.

Related:New rules, tax credits help with solar panels

“We don’t know what your utility rate is, but those numbers are accurate,” said Sawyer. “That would be the right-size system to offset 1 million kilowatt hours per year.”

The first question farmers ask is “how long will it take to get my money back?” says Sawyer. “With these tax credits, we don’t know that answer. The real question is what is the tax appetite of that farmer? Can that farmer use the 26 percent federal solar power tax credit to his benefit?”

With a 1-million project, the farmer will get a $260,000 federal solar investment credit on his next federal tax return. If the grower doesn’t have $260,000 in income to offset, he can spread the credit to future years’ returns.

“This is a rich farmer — not a $9 soybean farmer — this is a $15 soybean farmer, who is in the 37 percent tax bracket,” said Sawyer. “You might be in a corporation and have a 21-percent bracket. Unfortunately, state depreciation is not as healthy as federal. It will probably cap out at $25,000.”

A producer with a large tax bill on a $1-million project will have a net present cost of about $400,000 for the solar power system, Sawyer notes. “We’ve already established he is paying $80,000 a year for electrical energy. So $80,000 a year for five or six years justifies his net present cost of $400,000.

“The panels are warrantied for 25 years so they will certainly be functioning for the next 25 years, and they will continue to function at a lower efficiency.”

About the Author(s)

Forrest Laws

Forrest Laws spent 10 years with The Memphis Press-Scimitar before joining Delta Farm Press in 1980. He has written extensively on farm production practices, crop marketing, farm legislation, environmental regulations and alternative energy. He resides in Memphis, Tenn. He served as a missile launch officer in the U.S. Air Force before resuming his career in journalism with The Press-Scimitar.

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