Grid-tied Residential PV . . . it’s an Avoided Cost . . . think about it!
January 19, 2011 § 2 Comments
For a residential user, the installation of a PV grid-tied system has significant tax advantages that are rarely considered in determining the costs and benefits of a PV system.
By installing a grid-tied PV system, the system owner generates electricity that is consumed on the load side of the electricity meter. The result is a lower electricity bill. This, of course, is the economic benefit of solar electricity. The difference between the before PV and after PV electricity bill is an avoided cost. This is a cost you do not have to pay . . . a cost you have avoided! The avoided cost has an ‘after tax’ benefit, because you do not pay income taxes on the avoided cost. When you pay your electricity bill, you do so with ‘after tax’ dollars. Your electricity bill is not deductible for tax purposes, so it takes after tax dollars to pay your bill.
So, here is the impact. If your cost for electricity is 12.02ȼ kWh (EIA, the August 2010 U.S. residential average); and you use 1,000 kWh per month, your monthly electricity bill is $120.20. If your marginal federal income tax rate is 25%, it takes $160.27 of before tax earnings to pay your electricity bill:
$160.27 (before tax) x 25% (tax rate) = $40.27 tax liability
$160.27 (before tax) – $40.27 (tax liability) = $120.27 electricity bill
Why $0.1097 for a residential PV System? Click here…
The above analysis is not intended to be tax advice. Your circumstance may vary, so always consult your tax advisor for specific tax matters.
Now, what about FICA (Social Security and Medicare taxes)? Yes, here too. If your income is less than $106,800 [This is the maximum income for Social Security withholding], the additional tax from earnings is 7.65% for payroll workers and 15.3% for self-employed taxpayers. These taxes are often referred to as ‘payroll taxes’, because they apply to all workers at the same rate up to a specified income limit.
Using the same analysis and including FICA, if you are a salaried worker making less than $106,800, you need $178.47 of before tax income to pay the same electricity bill, and your effective rate is 17.85ȼ kWh. If you are self-employed and below $106,800 in earnings, you need $201.34 of before tax income, and the effective rate is 20.13ȼ kWh.
This is a forward-looking analysis, and it does not apply to commercial or business applications, because the cost of electricity is deductible from taxable income for a business.
Is PV an economic investment? Yes!
Chet Boortz, CEO
SES 21 USA
[The comments, positions, and opinions stated above are my own and may or may not represent those of SES 21 USA and its affiliate companies.]