Cumulative Payback and After Tax Cash Flow (Commercial, PV)

Dear Luke,
The spreadsheets are on the Financial Documentation page of this website, which you can get to from the Resources menu.
Best regards,

Paul.

Could you explain briefly why the energy value is reduced by the factor (1 - Effective Tax Rate)? It looks like this is saying that the owner pays tax on energy savings.

Thanks.

Hi Tom,
My explanation above is for the commercial financial model, which treats the energy savings as tax deductible (for a commercial entity). The payback equation for the residential model does not reduce the energy value.
That's explained in the Payback Period topic of SAM's Help system. Here's a link to a copy of the topic that we've posted on the website:
SAM Help - Payback Period
(You can also trace through the equations yourself in Excel by clicking Send to Excel with Equations on SAM's Cash Flows table on the Results page.)
Best regards,

Paul.

Hello,

I am modeling a system that doesn't require any loan, and I have specified all incentives that apply to the system (i.e. CBI, and state and federal ITCs). My main question is how do the "Federal Income Tax Rate" and "State Income Tax Rate" under "Tax and Insurance Rates" in the Financing tab effect the project. I understand they are manipulated to encompass the Effective Tax Rate, but are they guaranteed to effect every project? I notice that when I zero these inputs out that the payback period is much closer to the one I calculate by hand using a simplified method.

I guess my lack of knowledge about taxes is what is really effecting my understanding of this issue. Is it wrong to zero out these values? If so, are the default inputs of 28% for "Federal Income Tax Rate" and 4% for "State Income Tax Rate" for NY correct? I look forward to a response.

Regards,
Jon

Dear Jon,

How SAM handles income taxes depends on the financial model. Because the residential and commercial financial models are the only ones that calculate a payback period, I will limit my discussion here to those models.

The residential and commercial models assume that a single entity owns and operates the project and receives all benefits from the project, and are intended to model a scenario where the project owner is the building or home owner. The models also assume that the owner has sufficient "tax appetite" to use all of the project benefits. That means that the owner earns sufficient income to be able to deduct the full value of any tax incentives from the renewable energy project in the year that they apply. (SAM does not have any information about the owner's income.) SAM does not roll tax benefits over to future years.

The owner pays income tax on any incentives that are taxable (on the Incentives page in SAM, you check a box to determine whether or not an incentive is taxable). The electricity generated by the system represents a cash savings to the owner because the system reduces the owner's annual electricity bill. In other words, electricity sales are not considered taxable income. However, for a commercial project, SAM also assumes that electricity purchases are a tax-deductible operating expense (for both Federal and State tax purposes), so the owner must pay tax on the portion of its income that it would have deducted if the system were not in place.

I wish this were simpler, but I'm afraid anything to do with taxes is bound to be complicated!

Best regards,
Paul.

It has taken me a while to see that for the commercial customer energy costs are deductible, so even though the energy savings are not directly taxed, they result in a reduction of the energy cost deduction.

Thanks again.