SARS 12B Solar incentive for South African Businesses will end soon

SARS 12B Solar Incentive

Contents

1. Introduction

2. Section 12B Depreciation Allowance

3. How Depreciation Works

4. Financial Feasibility

5. VAT Implications

6. Offsetting Costs Against Profits and Accruing Losses

7. Time-Sensitive Nature of the SARS Incentive

8. Summary

1. Introduction

As South African businesses grapple with the ongoing energy crisis and rising electricity costs, many are turning to solar power as a sustainable and cost-effective solution. Beyond the obvious benefits of energy independence and reduced operational costs, investing in a solar system also offers significant tax and VAT advantages. This article explores these financial benefits, with a particular focus on the Section 12B depreciation allowance, its implications, and the time-sensitive nature of this opportunity.

You can download the full SARS 12B Law right here. First half is for home owners, its the second half you need to read.

2. Section 12B Depreciation Allowance

One of the most attractive tax incentives for businesses investing in solar energy is the Section 12B depreciation allowance. This provision in the Income Tax Act allows for an accelerated depreciation of 125% (In the year it is installed) on the total cost of a new and unused solar energy system, including installation, and batteries. This means that businesses can write off more than the actual cost of their solar investment against their taxable income.

Key points of the Section 12B allowance:

• Applies to new solar energy systems
• Offers a 125% depreciation rate in a single year
• Can be claimed in the first year of assessment in which the asset is brought into use

This accelerated depreciation significantly reduces the payback period for solar investments, making them more attractive to businesses of all sizes.

3. How Depreciation Works

Depreciation is an accounting method that allows businesses to spread the cost of an asset over its useful life. In the case of solar systems under Section 12B, the depreciation is accelerated, meaning the entire cost (plus an additional 25%) can be written off in the first year.

Example: If a business invests R1,000,000 in a solar system, they can claim a depreciation allowance of R1,250,000 (125% of R1,000,000) in the first year. This reduces their taxable income by R1,250,000, potentially saving them up to R350,000 in taxes (assuming a corporate tax rate of 28%).

4. Financial Feasibility

The financial feasibility of investing in a solar system is significantly enhanced by the tax benefits:

• Reduced payback period: The accelerated depreciation allowance can shorten the payback period by 2-3 years on average.
• Improved ROI: The tax savings contribute to a higher return on investment.
• Cash flow benefits: The immediate tax deduction provides a substantial cash flow benefit in the first year.
• Long-term savings: Beyond tax benefits, businesses enjoy reduced electricity costs over the system’s lifespan (20-25 years on average).

A typical 100kW solar system might cost around R1,000,000. With the Section 12B allowance, the effective cost after tax savings could be as low as R650,000, significantly improving the investment’s attractiveness.

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5. VAT Implications

The VAT implications of purchasing a solar system are generally favorable for VAT-registered businesses:

• Input VAT claim: Businesses can claim back the VAT paid on the purchase of the solar system as an input tax deduction.
• No VAT on generated electricity: it is VAT neutral, making further monthly savings.

These VAT benefits further enhance the financial attractiveness of solar investments for businesses.

6. Offsetting Costs Against Profits and Accruing Losses

The Section 12B allowance provides significant flexibility in how businesses can use the depreciation benefit:

Offsetting against profits:

• Businesses can use the depreciation allowance to reduce their taxable income in the year of installation.
• This is particularly beneficial for profitable companies looking to reduce their tax liability.

Accruing losses:

• If the depreciation allowance exceeds the business’s taxable income, it can create a tax loss.
• This loss can be carried forward to future tax years, providing ongoing tax benefits.
• It’s important to note that tax losses can only be carried forward if the company continues to trade.

This flexibility allows businesses to optimize their tax position based on their current financial situation and future projections.

7. Time-Sensitive Nature of the SARS Incentive

It’s crucial for businesses to be aware that the current Section 12B incentive is set to lapse at the end of the 2024/2025 financial year, which ends in February 2025. There is some urgency for businesses considering solar investments as these projects can take time to develop and impliment:

• Limited window: Businesses have a limited time to take advantage of this generous incentive.
• Installation timing: The solar system must be brought into use before the end of February 2025 to qualify for the current 125% allowance.
• Potential changes: While it’s possible that the incentive may be extended or modified, there’s no guarantee. Acting sooner rather than later ensures businesses can benefit from the current favorable terms.

8. Summary

Investing in a solar system offers South African businesses a range of tax and VAT benefits that significantly enhance the financial attractiveness of such projects:

• The Section 12B depreciation allowance allows for 125% accelerated depreciation in the first year.
• This accelerated depreciation reduces payback periods and improves ROI.
• VAT-registered businesses can claim input VAT on the purchase.
• The depreciation can be used to offset profits or create carried-forward losses.
• The current incentive is set to expire in February 2025, creating urgency for businesses to act.

Given these benefits and the limited timeframe of the current incentive, businesses should seriously consider investing in solar energy systems. Not only does it offer long-term energy security and cost savings, but it also provides immediate and substantial tax advantages. As with any significant investment, businesses should consult with tax professionals and solar energy experts to ensure they maximize the benefits while complying with all relevant regulations.

(Precautionary Note – I’m an Energy Consultant, not a Tax Practitioner, please consult with your Accountant)