• ITC Recapture

  • DRO's

  • Suspended Losses

  • Adjusted Taxable Income

The Solar Investment Tax Credit (ITC) is currently a 30% Federal Tax Credit (scaled down going forward) that is taken against the tax liability of an investor in solar energy property.

A tax credit is a dollar for reduction in income taxes an investor would pay the Federal government. The ITC is currently based on 30% of the eligible basis of the solar property. The 30% ITC is in effect for projects that begin construction through 2019. The ITC then steps down to 26 percent in 2020 and 22 percent in 2021. After 2023, the residential credit will drop to zero while the commercial and utility credit will drop to a permanent 10 percent.

Qualifying solar property is eligible for 5-year Modified Accelerated Cost Recovery (MACRS) depreciation. Equipment that claims the ITC must have its depreciable basis reduced by one-half the value of the ITC. Effectively this means the owner of the property can depreciate 85%of the property’s tax basis.

A Deficit Restoration Obligation (DRO) is also a common feature in tax equity deals, especially solar because the tax investor’s capital account typically is driven to zero during the first couple years of the project life cycle, due to the ITC and MACRS depreciation. A secondary feature, with the DRO, will be a suspended loss position that originates with the tax investor and persists for a relatively short period of time, until the project level income turns positive and the tax investor comes out of deficit.

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