Question regarding effect of federal ITC and MACRS on project cash flow

Hi,

Coherent with what seems to be the case, depreciating under the MACRS results in a tax deduction on federal income, and the 30% federal ITC results in a reduction in tax liability in SAM. However, how come that these are allowed to result in net tax benefits (negative tax liability) and thereby count positive towards the after-tax project returns?

I was under the impression that the ITC counts as non-refundable tax credit at the IRS and thus is not allowed to be counted towards a tax refund, and depreciation tax shields are surely not eligible for tax refunds in the US? I would appreciate if anyone could help me shed some light of this issue, as I need to consider it in a Single Owner model I'm using for a thesis project in a way which is coherent with US tax regulation.

Thanks on beforehand!

Hello,

SAM's cash flow model only considers income and tax liability and benefits of the project. It does not have information about the project owner's (tax payer) other sources of income and taxes. SAM considers tax benefit to be positive cash flow so that the value of the energy generated by the system accounts for the projects costs and benefits. The single owner financial model assumes that the project owner has sufficient tax appetite to absorb all of the project's tax liability and benefits. This method is not intended to represent tax credits as cash refunds.

Best regards,
Paul.

Hi Paul,

Thanks for your insight and quick reply! I had not considered this, but it does actually sound like a plausible assumption for my level of detail. However, out of curiosity, is there (to your knowledge) some way of modifying the model to reflect a situation which more resembles a SPE (Special Purpose Entity), where the project itself is the only source of income and tax?

Hello,

It is not possible to modify SAM's financial models. However, for the Single Owner, Residential and Commercial financial models, if you are running SAM on a Windows computer, you can export the financial model to an Excel workbook with formulas (click "Send to Excel with Equations" on the Cash Flow tab of the Results page) to export the relevant SAM inputs to Excel where you can see how the model works and modify the workbook equations.

Best regards,
Paul.