Alternative Power sources - Cost Justification for all non utility Power production

Author

Cost Justification for all non utility Power production

Jim Baber

2005-06-25, 11:25 pm

I realize that between the high cost of Pacific Gas & Electric's
electric power, the rebates ($4.00 / W), and the 15% state income tax
credit on the remaining costs) that were available when I installed my
solar PV system (10 kWh), that the savings we have realized on our
power bill will pay for our system in just 78 months of operation at the
current rate structure. I do recognize that this is unusual, and I do
appreciate the advantages California provided for those that acted at
that time before June 2003. The new bill which it appears will pass
soon will return to a better rebate schedule than now, but not as good
as mine.

One aspect that I feel has not been talked about much as far as cost
justification, is the income tax avoidance after the system is paid
for. At my current rates for power I am NOT paying about $5,100 per
year. I will have paid the actual $35,000 cost of my system including
interest by using the money saved by the reduction in power costs to pay
off the loan I used to pay the system costs. Thereafter this $5,100 in
after tax cash will be available for whatever we want. Remember the
additional interest on your loan is tax deductible from your income and
your power bill is not.

NOTE, this will be after tax money, and is roughly equivalent to before
tax income of $9,200, in our case at the current tax rates that can be
invested or just enjoyed.

These tax impacts are justifications I have not seen from anyone. Comments?

Vaughn

2005-06-25, 11:25 pm

"Jim Baber" <jim@baber.org> wrote in message
news:bvCdnUhK25tpVCDfRVn-rA@comcast.com...

quote:

>I realize that between the high cost of Pacific Gas & Electric's
> electric power, the rebates ($4.00 / W), and the 15% state income tax
> credit on the remaining costs) that were available when I installed my
> solar PV system (10 kWh), that the savings we have realized on our
> power bill will pay for our system in just 78 months of operation at the
> current rate structure. I do recognize that this is unusual, and I do
> appreciate the advantages California provided for those that acted at
> that time before June 2003. The new bill which it appears will pass
> soon will return to a better rebate schedule than now, but not as good
> as mine.
>
> One aspect that I feel has not been talked about much as far as cost
> justification, is the income tax avoidance after the system is paid
> for.

I have read your explanation carefully and I see no income tax avoidance
after the system is paid for, I only see a reduced expense (that $5,100 that you
are NOT paying to PG&E) which certainly will result in more money in your
pocket. However, you are still paying tax on your income. Can you help me
understand?

Also, remember the principle of "Net Present Value" (NPV) NPV is a simple
concept; how much are you willing to pay today for a dollar that you expect to
receive X years from now? Hint: It is less than 1 dollar. If there is the
prospect of inflation on the horizon (like we have today) the answer may me
something that is a tiny fraction of one dollar. If you are doing spreadsheets,
the formula for NPV is built into most programs (@NPV) You will have to input
an assumed future interest rate.

Vaughn

daestrom

2005-06-26, 12:25 pm

"Jim Baber" <jim@baber.org> wrote in message
news:bvCdnUhK25tpVCDfRVn-rA@comcast.com...

quote:

>I realize that between the high cost of Pacific Gas & Electric's
> electric power, the rebates ($4.00 / W), and the 15% state income tax
> credit on the remaining costs) that were available when I installed my
> solar PV system (10 kWh), that the savings we have realized on our
> power bill will pay for our system in just 78 months of operation at the
> current rate structure. I do recognize that this is unusual, and I do
> appreciate the advantages California provided for those that acted at
> that time before June 2003. The new bill which it appears will pass
> soon will return to a better rebate schedule than now, but not as good
> as mine.
>
> One aspect that I feel has not been talked about much as far as cost
> justification, is the income tax avoidance after the system is paid
> for. At my current rates for power I am NOT paying about $5,100 per
> year. I will have paid the actual $35,000 cost of my system including
> interest by using the money saved by the reduction in power costs to pay
> off the loan I used to pay the system costs. Thereafter this $5,100 in
> after tax cash will be available for whatever we want. Remember the
> additional interest on your loan is tax deductible from your income and
> your power bill is not.
>
> NOTE, this will be after tax money, and is roughly equivalent to before
> tax income of $9,200, in our case at the current tax rates that can be
> invested or just enjoyed.
>
> These tax impacts are justifications I have not seen from anyone.
> Comments?
>

I do not see how you avoid income tax with your situation. If you financed
the installation as a home improvement loan, then yes, the interest is an
allowable deduction. And assuming you have enough deductions to itemize,
this deduction can reduce your income tax bill. But you still have the
interest you have to pay, which you wouldn't have if it wasn't for the PV
installation. So the loan interest deduction just serves to reduce the
effective interest rate on the loan. If you got it financed/refinanced when
the rates bottomed out around 4%, and financed $20,000, then simple annual
interest would be $800 and if you were in the typical 27% tax marginal tax
bracket, then you would get a deduction that would reduce your taxes by 27%
* $800 = $216 / year. But you 'saved' this $216 in income tax by 'spending'
$800 in interest.

But deductions can be a bit tricky. For example, if that $800/year put your
itemized deductions to just $200 over the standard deduction, then you
*really* only save 27%*$200 = $54 /year. And with a straight loan, the
amount of interest drops each year, so the tax-deduction/savings also drops
from year to year. But you're right, at least that's *something*, whereas
the utility bill (and even the various taxes that are included on it) are
*not* deductable at all (for a homeowner).

Of course, I don't know anything about CA state income taxes, so there may
be some additional savings there. But it is probably a small fraction of
whatever federal tax savings are, unless CA has some special income-tax
credits for people with solar installations. That would have to be some
*income* credit, not the rebate program you already mentioned.

Overall, if one borrowed $20000 at 4%, the P&I would be about $1472/year for
20 years. In the first year, of that $1472, $800 would be interest, the
rest principle. As I discussed above, if that $800 is deductable at 27%,
then you save $216 in income tax. The bottom line is you pay $1472, and get
$216 back from Uncle Sam, and avoid a cost of $5100. That puts you about
$3844 to the 'good' for the first year.

As far as the $5100, yes this is 'free' after tax money. No additional tax
due, and you are 'free' to use it as you wish. But $5100 after federal
taxes wouldn't be equivalent to $9200 *before* taxes unless you happen to be
in the (1 - $5200/$9200) = 43.5% tax bracket (pretty unlikely unless you
have a very odd tax situation). A more typical 27% tax bracket would imply
a before tax equivalent of $5200/(1-27%)= $7123. Of course, your situation
might be different.

But thinking about it, your electric bills must have been something. My
total utilities, including gas, water, sewer and electric in the great
snow-belt off the Great Lakes run about $2700 /year. Mind you, we don't A/C
much, but the heating in wintertime can be tough.

The present value of 20 equal future payments of $5100 invested at 7% over
20 years is about $54000 (not considering maintenance costs or longer life).
So since your installation cost less than that ($35000), you made a good
investment. Particularly since the true cost to you after rebates was even
lower. As I recall Jim, you also had some other reasons (reliability and
health issues) that made your choice the right one for you.

One of the difficulties with discussing tax consequences is that just about
everyone is different. If you don't already have enough deductions to
itemize, the deductability of finance interest isn't clear-cut. Each
state's rebate/credit programs are different, and subject to frequent change
(vote in a new governor and look what happened in CA). And some (such as
off-gridders) have either huge grid-installation fees that they avoid by
going non-utility, or a certain amount of satisfaction just not beholding to
'the utility'.

And although some form of solar has been around for many years, there still
isn't a clear-cut idea how it affects a home's value. There have been
stories of systems failing prematurely as well as those working well past
their expected life. So the re-sale value it may or may not add to a home
is still a bit of a crap-shoot. It may improve the value, lower the value,
the buyer's bank may consider it a plus, or a minus in financing, or ignore
it completely. Not as simple as adding a second bathroom or a fireplace ;-)

In all this, I've ignored inflation. Assuming you have a fixed rate loan,
and a long-term inflation rate of 3%, you can just reduce the investment
interest rate by your guess of general inflation to get the present value of
future payments adjusted for inflation. The only real difference would be
is if your avoided cost (the $5100 in annual utility bills) rises
faster/slower than inflation, then it could skew the numbers. If electric
rates rise *faster* than general inflation, then your installation looks
better and better. If rates are frozen for an extended period while general
inflation rises, then the 'value' of your avoided cost is eroded and your
situation would not be as rosy. But who has an *accurate* crystal ball???

daestrom

Derek Broughton

2005-06-27, 6:25 pm

daestrom wrote:

quote:

>
> "Jim Baber" <jim@baber.org> wrote in message
>
>
> I do not see how you avoid income tax with your situation. If you
> financed the installation as a home improvement loan, then yes, the
> interest is an
> allowable deduction. And assuming you have enough deductions to itemize,
> this deduction can reduce your income tax bill. But you still have the
> interest you have to pay, which you wouldn't have if it wasn't for the PV
> installation. So the loan interest deduction just serves to reduce the
> effective interest rate on the loan.

OK, I don't have a clue about either of your income tax systems, but
interest paid on _any_ loan here (NS, Canada) would be a small fraction of
the cost of income tax (otoh, in our system, unless I've been wasting money
for years, I can't deduct the cost of that loan - I can deduct loan
interest only for loans taken out for the purpose of making money, not
electricity).
--
derek

daestrom

2005-06-27, 11:25 pm

"Derek Broughton" <news@pointerstop.ca> wrote in message
news:e3i5p2-uja.ln1@othello.pointerstop.ca...

quote:

> daestrom wrote:
>
>
> OK, I don't have a clue about either of your income tax systems, but
> interest paid on _any_ loan here (NS, Canada) would be a small fraction of
> the cost of income tax (otoh, in our system, unless I've been wasting
> money
> for years, I can't deduct the cost of that loan - I can deduct loan
> interest only for loans taken out for the purpose of making money, not
> electricity).

Well of course your in CA, so I don't know anything about your tax system.
But just to sort of explain a bit about the US system, not all of our
'income' is subject to taxes. Certain expenses and such can be 'deducted'
from our total income prior to calculating the amount of tax owed. The
interest on certain home mortgages is one of those 'expenses'.

So for every $100 we pay to the bank, we get a tax break of $27 (typical) on
our income tax. So the interest really only 'costs' us $73.

daestrom

quote:

> --
> derek

John P Bengi

2005-06-27, 11:25 pm

In Canada, None of our interest or expenses can be deducted. But then we
have curbs on our roads and US made cars that rust out in 6 years.

"daestrom" <daestrom@NO_SPAM_HEREtwcny.rr.com> wrote in message
news:nMZve.56634$g5.20329@twister.nyroc.rr.com...

quote:

>
> "Derek Broughton" <news@pointerstop.ca> wrote in message
> news:e3i5p2-uja.ln1@othello.pointerstop.ca...
itemize,[vbcol=seagreen]
PV[vbcol=seagreen]
of[vbcol=seagreen]
>
> Well of course your in CA, so I don't know anything about your tax system.
> But just to sort of explain a bit about the US system, not all of our
> 'income' is subject to taxes. Certain expenses and such can be 'deducted'
> from our total income prior to calculating the amount of tax owed. The
> interest on certain home mortgages is one of those 'expenses'.
>
> So for every $100 we pay to the bank, we get a tax break of $27 (typical)

quote:

> our income tax. So the interest really only 'costs' us $73.
>
> daestrom
>
>
>

Derek Broughton

2005-06-28, 12:25 pm

daestrom wrote:

quote:

> Well of course your in CA, so I don't know anything about your tax system.
> But just to sort of explain a bit about the US system, not all of our
> 'income' is subject to taxes. Certain expenses and such can be 'deducted'
> from our total income prior to calculating the amount of tax owed. The
> interest on certain home mortgages is one of those 'expenses'.
>
> So for every $100 we pay to the bank, we get a tax break of $27 (typical)
> on
> our income tax. So the interest really only 'costs' us $73.

Right - but current loan rates are under 10% (here - I would expect
approximately the same in the US), so you're not paying tax at an apparent
rate of 27%, but paying the bank 10%. Seems like a deal to me.
--
derek

2005-06-28, 6:25 pm

In article <c7GdnZVFy4mO613fRVn-3Q@golden.net>,
"John P Bengi" <JBengi (spamm)@(spamm) yahoo,com> wrote:

quote:

> and US made cars that rust out in 6 years.

only because YOUR not smart enough to "Undercoat" them, before
you drive them around on your "Salted" winter roads.....
This isn't Rocket Science, only common sense......

Me

daestrom

2005-06-28, 11:25 pm

"Derek Broughton" <news@pointerstop.ca> wrote in message
news:h176p2-ck9.ln1@othello.pointerstop.ca...

quote:

> daestrom wrote:
>
>
> Right - but current loan rates are under 10% (here - I would expect
> approximately the same in the US), so you're not paying tax at an apparent
> rate of 27%, but paying the bank 10%. Seems like a deal to me.

No, I don't understand what you're trying to say. Yes, interest rates here
are under 10% also, but that doesn't make much difference.

Let's say I borrowed $100,000 to buy and fix up my house, and the interest
is 5%. So for the first year, I pay about $5000 in interest to the bank
(not quite, since the amount goes down as the principle is paid).

Now, let's further suppose that my income is $50,000 and I'm in the 27%
income tax bracket. Since we're on a 'graduated' tax system, my tax bill
*before* taking out the loan might be something like: first $5,000
tax-free, next $10,000 taxed at 15%, and the last $35,000 taxed at 27%. So
the total tax could be something like 15%*$10,000 + 27%*$35,000 = $10,950.
(these aren't the real tax bracket numbers, but they illustrate the
calculation).

But if I can deduct the interest I pay on the loan, then my tax bill would
be lower. Only $45,000 of my income would be taxable, so the bill would
calculate something like: first $5,000 tax-free, next $10,000 taxed at 15%,
and the last $30,000 taxed at 27%. The total would be 15%*$10,000 +
27%*$30,000 = $9,600. This is $1,350 lower than if I don't take the
deduction. It works out the same as if I took the 'marginal' tax rate of
27% (the rate the *last* dollar of income is taxed), times the amount of the
deduction (27% * $5,000 = $1,350).

If I didn't have to pay the interest at all, I'd be further ahead ($5,000).
But if the interest is deductable and I'm in the 27% tax bracket, then the
$5,000 in interest reduces my tax bill by $1,350. So it *really* only cost
me $3,650 for the first year to borrow that $100,000. Worst case is if the
interest is *not* deductable, then I pay $5,000 in interest and still have
to pay $10,950 in taxes.

Government tries all sorts of rules/codes to give the tax payer an
'incentive' to make certain kinds of investments. Home mortgage interest is
just one of them. But it ends up making the US tax code one of the most
complicated set of documents there is. Even the IRS often messes up when
they do an audit on someone.

daestrom

John P Bengi

2005-06-28, 11:25 pm

LOL.. if you only know how much people spend in undercoating here every
year. It doesn't do it.

Despite all the undercoating a Toyota or Honda outlasts the USanian junk
without undercoating, regardless of where it is made.

"Me" <Me@shadow.orgs> wrote in message
news:Me-8A8427.11430728062005@netnews.worldnet.att.net...

quote:

> In article <c7GdnZVFy4mO613fRVn-3Q@golden.net>,
> "John P Bengi" <JBengi (spamm)@(spamm) yahoo,com> wrote:
>
>
> only because YOUR not smart enough to "Undercoat" them, before
> you drive them around on your "Salted" winter roads.....
> This isn't Rocket Science, only common sense......
>
>
> Me

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