MicroFIT financials: inflation, taxes, and break-even
In this article I looked at the worst case scenario of how panel output degradation and inflation cut into expected microFIT income. Thanks Maury for posting a comment to correct me that actual degradation, at least in one case, is significantly less than warranty levels suggest. Unfortunately inflation still remains a (bigger) problem.
In addition, there is a small issue of income taxes.
As we discussed in other articles, solar panel depreciation will be gradually written off against microFIT income, up until break-even point (when there is nothing left to depreciate). At that point, income tax kicks in. This horse is beaten enough.
For most microFIT owners, income tax will be charged at the marginal tax rate depending on your total personal income for the year. Let’s say for the sake of argument that folks with lower levels of income will not be spending money on microFIT, so let’s say we are somewhere in the middle. According to this CRA table, provincial and federal taxes might be around 33-36%.
Unfortunately, microFIT is no longer being offered to small business, so… this tax rate is what it is. Grandfathered microFIT systems that were registered under corporate entities will be subject to corporate income tax rates, which in case of small business is something like 18% – half of our personal tax rate in this example.
How income is affected by income taxes
So, the plot thickens…
- We started with expected monthly return of $3,500, total income $70,000
- With worst-case scenario degradation reduced income by $6,755 (10%) to $63,245
- With 2.5% annual inflation, we lose $13,636 in purchasing power (20%), down to $49,609 in present-value dollars
- Finally, once the break-even is reached, we start paying 36% income tax and lose an additional $7,494 (another ~10% or so). Total microFIT income, after tax and in present value dollars is now $42,115
And that’s how $70,000 becomes $42,115 – and technically nothing was actually stolen.
How break-even is affected
Now, the break-even. To keep this example simple, we start paying income tax when cumulative microFIT income exceeds our theoretical $27,000 installation cost:
In this table above we’ve got BE 0 = break-even in the reference calculation of $3,500 per year – this is the numbers you see in sales brochures, quotes, and proposals.
BE 1 = break-even with worst-case panel output degradation. Break-even slips away by about a year.
BE 2 = break-even with degradation and inflation. Break-even slips away by another year.
So the forces of nature move break-even away by two years. This brings us to the first tax bill in year 11.
- When you get microFIT quotes and such, read not only what they are, but also how they get there
- If you don’t get enough detail, ask. If you don’t get answers, go someplace else
- There is a difference between $70,000 and $42,115
- If you get a brochure that advertises microFIT returns of 14% or even 17% per year, RUN