How Solar Panels on Commercial Property Affect Real Estate Tax Assessment

Sep 14, 2022 | Business Law

Solar Panels

Solar power generation is on the rise, and, given the proliferation of the technology, virtually every property owner with a roof can get in on the action. Commercial property owners can benefit either by generating solar power for onsite consumption or for sale to power-supplying utility companies. A commercial property owner considering adding solar power generators to its building should be aware of the potential property tax implications of installing and operating this kind of equipment.  

Solar Equipment is Taxable

You may already be aware that improvements to your building or structure will increase your property taxes. With solar panels, you might be thinking: This is just removable equipment, is it even taxable at all as real estate?

Currently, and for many years, the rule in New York is that solar panels and associated distribution machinery, including generators, are taxable regardless of whether such equipment is moveable. The equipment is considered part of the real property.

The equipment is also taxable regardless of whether you use it to generate power for your own use or sell the power to a utility. Some companies may benefit from selling the power to the grid, subject to income tax of course.

Your Tax Increase

How much will your property taxes increase if you add a solar system? This is really two questions – how does the government assessor value it? And what is the tax rate where it is located? You cannot do anything about the second question (unless you are willing to relocate), so the answer is all tied to the first question.

The assessor will likely use the RCNLD method (reconstruction cost for new facilities, less the depreciation accrued for such facilities) to calculate the value of the equipment. This means the way to value the equipment is by calculating what it would cost to build new and then subtracting any depreciation. This is the same method used to value other electricity-generating facilities. To find the reconstruction cost, the assessor would look at the same materials, construction standards, layout, and quality of workmanship, including all deficiencies. To assess depreciation, the assessor would take into account physical deterioration, as well as economic or functional obsolescence. 

Paul Vargovich of National Solar Technologies in Buffalo, New York notes that;

“How your system is valued can vary from town to town, especially where the assessor does not have experience with these valuations. There are guidelines provided by NYSERDA to assist town assessors located at: Solar Guidebook for Local Governments. The State is also looking at instituting a set formula of assessing solar energy systems so that the tax amount is more predictable for solar developers, giving them a better understanding of what the potential real property tax liability is when developing a solar project.”

Possible Tax Benefits

Both New York State and the federal government provide solar incentives for commercial property owners.

In New York, Real Property Tax Law Section 487 allows for a 15-year exemption if the energy system meets the guidelines of the New York State Energy Research & Development Authority (NYSERDA). 

However, not all cities, counties, towns, villages, or school districts permit this exemption. A taxing jurisdiction that does not opt-out can require an owner to pay an annual fee or “payment-in-lieu of taxes” (PILOT) as a replacement for the taxes it would have otherwise collected. Under the law, PILOT amounts cannot exceed what the tax amount would have been without the exemption. The PILOT amount is negotiated between the owner and the jurisdiction. The amount may be determined on a project-by-project basis, or there may be a jurisdiction-wide rate typically in the form of annual payments based on a dollar-per-MW rate. 

In New York City, instead of the Section 487 tax exemption, property owners who add solar may apply for the Real Property Tax Abatement Program. Visit the NYC Department of Buildings to get more information.

New York State also offers commercial solar incentives and financing options to help with the costs of installing solar equipment. 

On the federal side, the energy tax credit is a dollar-for-dollar reduction in your business’s federal tax liability. Businesses that install and use solar equipment can get an energy credit, which is part of the investment tax credit. The amount of the credit is a percentage of the cost of the solar energy property that is placed in service during the current year. The percentage amount for 2022 is 26%. This will decrease to 22% in 2023, and 10% in 2024. Any unused credit can be used for the prior year and carried over for up to 20 years.

Property owners can lease a solar system instead of owning one, but will not receive the federal energy tax credit. Leasing a solar system has multiple benefits and disadvantages that you should carefully consider with an attorney.

Additional Benefits of Adding Solar

By adding solar, your business may be able to sell power to the grid or receive a credit from the utility. More information can be found here.

The use of solar energy contributes to a cleaner, healthier, and more sustainable environment. Solar energy helps reduce your business’s carbon footprint and the presence of harmful air pollutants, like sulfur dioxide. 

Sustainable practices, like the use of solar energy, are desirable to clients, customers, employees, and tenants. By installing solar panels on your property and demonstrating a commitment to a cleaner environment, you may make your brand more attractive to those who share the same values.

The information provided in this blog entry does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this blog entry is for general informational purposes only. Information in this blog entry may not constitute the most up-to-date legal or other information. Reading or using the information in this blog entry does not create an attorney-client relationship with Kavinoky Cook LLP.