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Business PV Cash Flow

Business Solar System Pays For New Hybrid




March 2, 2009
By Craig Severance

Our 10 KW photovoltaic system for my wife’s office is not only paying for itself -- but also generated enough extra cash flow to buy us a Prius. If you are a business owner thinking of installing a new solar system for your business, here’s how:

1.   Buy a Good Solar System for Your Business.

By "good", I mean a good quality system that is well sited, and saves energy you are buying -- i.e. is no bigger than you need. (I stress "no bigger than you need" because if you generate more kWh’s than you use, those extra kWh’s are not worth very much.) Lets use as an example a 10 KW photovoltaic system costing $7,500/KW installed, for a total cost of $75,000.

2.   Take Advantage of Utility Rebates.

Our utility, Xcel Energy, currently pays $3,500/KW against the cost of a small (up to 10 KW) photovoltaic system. You must commit to operating it on their grid for 20 years, so if your business will sell or move, you’ll need future owners to honor this. The utility rebate is paid directly to the solar installer, so you only need to come up with $40,000. That’s about the cost of a big new truck – remember those SUV "tax write-off" trucks? They saved taxes but never really paid for themselves. Solar does.

 

 

 

 

 

3.   Finance the Solar System.  As a business owner, you know how to finance equipment. We refinanced our building loan, and our bank tacked on the $40K. Using 25-year amortization, and including $2K for closing costs, financing $42,000 adds about $300/month to the loan payment. Don't let today's credit crunch discourage you -- a lot of regional and local banks are still ready to lend, and many have "Green Loan" funds available.  Financing your share of the system cost into a series of monthly payments is the key to extracting cash flow from this project -- because the utility bill and tax savings in the early years of the project are much greater than the monthly loan payments.

4.   Save on Your Electric Bills.   In sunny Grand Junction, CO our 10KW system produces about 17,000 kWh/year for about $1,900 in electric bill savings the first year.  If rates go up 10%/yr, so will our savings.

5.   Take Your 30% Federal Tax Credit - or Grant.  As a business, you must include the utility rebate in taxable income.  However, this means your basis in the system is the entire $75,000 cost -- so your 30% Investment Tax Credit would be $22,500.  If you can't use this much tax savings and want to apply for a Grant instead, in 2009 and 2010 businesses can apply to Treasury to receive this as a cash Grant.

6.   Take Other Tax Savings.  Businesses depreciate solar equipment on 5-yr accelerated depreciation on the system cost after subtracting 1/2 of the Tax Credit or Grant, so with a 30% ITC or Grant you can still depreciate 85% of the cost.  If you install the system in 2009,  you can take 50% Bonus Depreciation. Thus, systems installed in 2009 will have a very big depreciation writeoff to offset the income from the utility rebate. You can also deduct the loan interest.  However, you will no longer be able to deduct such huge electric bills. 

7.   Add it All Up.  For this example (details here), we show a net positive cash flow in the first six years of almost $25,000.  After year 6, the electric bill savings are about the same as the extra loan payments, so the cash flow reaches breakeven and levels off.  Below is a simple chart of the Net Accumulated Cash Flow to the owner, taking into account what you have to pay: extra loan payments, taxes on the utility rebate, and extra taxes for having lower electric bills.  Cash back to the business owner includes the 30% Tax Credit (or Grant), electric bill savings, and tax savings from the project's interest and depreciation deductions.  The chart below does not assume 50% Bonus Depreciation which is now available for 2009, to see details of that effect look here.   Overall the project shows the savings are much higher than the amounts paid out, which could allow you to spend that extra cash on something else  (like a hybrid): 

 

 

 

 

 

 

 

 

 

 

8.   Buy Your Hybrid. 

Although it might take 6 years for the solar project cash flow to fund the purchase of your new hybrid, if you qualify for a car loan, you could buy your hybrid the first year with a car loan.  The nearly $15,000 in overall solar project savings the first year makes a nice down payment.  To implement cash savings before you do your tax return, you can change your Federal Income Tax wage withholding, or Estimated Tax Payments to account for the amount of taxes you are not going to owe.  (Be careful not to cut your state income tax payments, however, since the solar credit is a Federal tax break.) 

Disclaimer & Cautions About Tax Traps

As a CPA, I have to disclaim that any of the above is not specific tax or business advice, and I really mean it.  You should get costs and kWh savings numbers from your local solar firms. Then, have a competent CPA who is very familiar with these solar tax rules analyze your own specific situation.  Be especially careful of basis  issues in how you finance the system -- for instance, S-Corporation owners generally have to contribute their own funds.  Also, if you own both the building and the operating business and you rent the building to the operating business, be aware that rental losses and tax credits are usually considered passive and can't be used to offset income taxes from the operating business.  (In other words, its usually best to have the operating business own the system.)  In my CPA practice here in Colorado, several local solar firms will reimburse customers for the cost of the financial/tax analysis.

Conclusion

It is definitely worth investigating solar if your business has a good place for solar panels, and your business can use the power -- even if you choose to spend the extra cash on something other than a new hybrid.

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This Article was originally published on March 2, 2009 and is posted under Electricity - Core Solutions - Solar Photovoltaic.

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