Tax Law Change Could Help 150,000 US Churches and Non-Profits Go Solar

Here's a copy of a proposal I've sent to my representative in Congress, Anna Eshoo. If you like it, please copy it and send it to your representative too.

Opportunity
1) Congress could enable 100,000 churches and 50,000 small non-profit organizations to put solar panels on their roofs in 2009-11 by a minor and temporary change to existing tax law.
2) The example these churches and non-profits set is likely to inspire hundreds of thousands of homeowners to add solar to their homes, thereby stimulating the economy and helping the environment.

Current Situation / Problem Statement
Federal incentives for solar photovoltaic (PV) systems are tax incentives. This puts churches and other non-profit entities that want to get rooftop solar at a terrible disadvantage – they have no taxes to offset.

The solar industry and Wall Street have partially addressed this problem by creating Power Purchase Agreements (PPAs). With a PPA, an investment firm buys, owns, and maintains the solar system on the roof of a non-profit in exchange for a long-term contract to sell all the power from the system to the non-profit. PPAs effectively and legally move the 30% investment tax credit (ITC) and depreciation of the solar assets from the non-profit “host customer” to the for-profit PPA provider.

However, the PPAs are not being offered for the small solar systems – the size most churches and non-profits need -- because the administrative overhead of selling and setting up a PPA is essentially the same no matter how large or small the system is. The very few PPA providers who have ever tried providing quotes for systems smaller than 30 kW found that the offers are not being accepted and have withdrawn from this market segment. As a result, there is no financially viable way for most churches and other small non-profits to install solar PV without paying for them using cash or borrowed funds.

Potential Solution / Tax Roadblock
For solar systems in the 5-30 kW range ($25,000 - $180,000 after incentives), many individuals have adequate capital to fund and own a solar system on a non-profit’s roof. In California, such an investor could earn a modest after tax return of 3-7% if two impediments in the tax code were removed. The first issue is the passive activity loss limitation which prevents most taxpayers from using the depreciation of their solar system to offset ordinary earned income. The second is the difficulty of passing the active participation tests. (If a taxpayer passes one of these tests, he or he can treat passive income as active).

Requested Change in Law

1. For a limited period (such as tax years 2009-2011)
2. For a limited class of renewable energy investments (such as solar PV and solar thermal)
3. For a limited group of eligible projects (such as 501(c) non-profit entities)
4. For a limited group of taxpayers (such as filers with AGIs less than $400,000 if married filing jointly or $200,000 if single)
5. Amend the passive loss rules to allow passive losses from leases and power purchase agreements to offset active income, not just passive income.

Example
Suppose that Jane and John Smith want to help their church go solar by purchasing a solar system that will be installed on the church’s roof. They want to recoup their investment by entering into a 15-year PPA with their church. Assume the Smiths have “modified adjusted gross income” of $155,000.

Under current law, if they invest $80,000 to buy a 10 kW solar system (a fairly typical size) they would be able to claim $48,000 of depreciation as a passive loss in the first year of ownership[1]. However, because their income exceeds the Passive Loss Allowance Limit of $150,000, they could not offset any of their non-passive income with this passive loss. Therefore, they will not be able to use this loss from a tax standpoint until the solar system’s revenues exceed its expenses many years in the future. The fact that the tax benefits cannot be harvested early in the ownership period makes this an unattractive investment for them.

Example with Change in Law
The Smiths would see things quite differently if they could benefit from the depreciation immediately. The investment would be quite attractive, and the Smiths would be willing to invest in solar for their church even though the overall IRR is modest. From their perspective, it would be like buying a bond or annuity but with an added environmental benefit. The church would benefit by getting 15 years of renewable energy with no upfront investment. The example set by the church would probably inspire many parishioners to purchase solar for their own homes who would not otherwise have done so.

Argument from Precedent
Current tax law already recognizes that some taxpayers should be able to use passive losses to offset some amount of non-passive income. That’s the whole purpose of the passive activity loss allowance, which allows taxpayers with modified AGI of $100,000 or less to offset up to $25,000 of passive losses against non-passive income. The proposal expands the existing rule to investments in renewable energy.

Scale of the Opportunity
Suppose 100,000 churches and non-profits entered into solar PPAs, with an average system size of 10 kW and price of $80,000 (before incentives). That’s one million kilowatts or 1,000 megawatts – about 600 times what Google has put on the roof of its headquarters in Mountain View. The amount of private investment leveraged would be $8 billion. These figures do not include the impact from homeowners who purchase solar systems because they were inspired by their church’s example, but their purchases could add a 3x multiplier or more.

Current tax law already allows these tax benefits to be achieved, but only by large investors who have shunned this particular market segment. The proposal opens up a new path for capital to flow to churches and small non-profits – money from parishioners who are wealthy enough to want to help their parish and their planet, but not so wealthy that they would ever consider an outright donation of solar. There are millions of Americans who fit that description.

Having a 2 or 3 year time limit on this program would spur all parties to move quickly. This sense of urgency would stimulate the economy and hasten the end of the recession.

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[1] 5 Year MACRS with 50% stimulus depreciation allows them to depreciate 60% of their investment in Year 1.