What the solar tax rebate means for your small business

Small business owners were very excited to hear that the budget made provision for a tax rebate if they go solar, but not everybody understands what it means for small business.

Although a tax rebate of 125% sounds fantastic, it only applies to solar panels and businesses still have to fork out money for inverters and batteries, the real expensive part of going solar.

Roger Hislop, energy management systems executive at CBI :energy, says the solar panel tax incentive means businesses can claim a 125% deduction in the first year for all renewable energy projects without generation capacity thresholds, for investments brought into use between 1 March 2023 and 28 February 2025.

“This deduction will reduce tax liability for businesses with positive taxable income. For example, a R1 million investment could qualify for a R1.25 million deduction, potentially reducing that corporate income tax liability by R337 500 in the first year.”

However, Hislop points out that the solution is temporary.

“Businesses will still need to come up with their own plans to ensure continued operations during long bouts of load shedding. It is also important to note that it is battery storage that provides critical energy security to ensure machines and computers are still running, not solar on its own.

“Battery storage will prove crucial when solar generating capacity is insufficient, especially as the days get shorter coming into winter.”

He says as batteries and inverters are extremely pricey, the smart thing to do is to implement load management, which will stop the inverter from being overloaded and tripping and prevent the battery from draining unnecessarily. Someone heating their leftover pizza in the company kitchen at lunchtime could flatten the batteries and crippling the business.  

Smart metering at several key points in the electrical network will also enable them to gather and analyse real-time electricity consumption to identify where energy is consumed, when and by what to identify low-hanging, energy-guzzling fruit and make more plans to reduce energy consumption.”

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Is someone starting to make a plan to stop rolling blackouts?

“Every South African is currently faced with the ongoing negative effects of rolling electricity blackouts, which government euphemistically refers to as ‘load shedding’. It affects our businesses, our homes, our livelihoods, our safety and our faith in the future of our country,” says Jerome Brink, director of tax and exchange control practice at Cliffe, Dekker, Hofmeyr.

Everyone wondered if government would come to the party and provide some type of incentive or initiative that would help alleviate the pressure on the national grid and return the country’s energy supply to some semblance of normality.

He says Vietnam is a case in point.

“While electricity consumption in Vietnam increased substantially since the early 1990s, it enacted various reforms to keep up with this increased consumption, thereby avoiding an electricity crisis. This included various tax incentives, such as preferential tax rates for income derived from renewable energy, import duty incentives and other indirect tax incentives.”

On the other side of the spectrum is Venezuela, Brink says, which suffered a complete collapse of its national grid that took a week to restore due to the ongoing neglect of infrastructure and rampant corruption. 

“While National Treasury and Sars already played a role by granting renewable energy incentives, with the most well-known the ITA’s section 12B accelerated capital allowance on renewable energy assets, many South Africans increasingly called for an expansion of the existing incentives and initiatives to fast track the uptake in rooftop solar and wind energy.”

Currently, the section 12B allowance provides that businesses can deduct the costs of certain renewable energy installations over one or three years, which creates a cash flow benefit in the early years of a project.

“Under the expanded incentive announced in the budget, businesses will be able to claim a 125% deduction in the first year for all renewable energy projects with no thresholds on generation capacity.” 

This means, irrespective of the capacity of the renewable energy assets, businesses will be able to claim the 125% deduction. Brink says this is a departure from the existing incentive, which made a distinction between projects generating less than 1MW (which could be depreciated by 100% in year one) and those generating more than 1MW (which could be depreciated over a three-year period).

It also aligns with the recent increase in the licensing threshold for embedded generation to 100MW. 

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A large-scale intervention, but not enough relief for SMEs

For Jeremy Lang, chief investment officer at independent SME financier, Business Partners Limited, this was the answer he wanted from the budget when said he hopes that “large-scale interventions” would be on the cards for the small business sector in the form of much-needed relief measures.

However, he says, this year’s budget delivered little in the way of SME-specific relief although it proposed several measures to address the resounding impact of rolling blackouts on small businesses.

Lang suggests that small businesses review the viability of installing solar energy systems to power their operations.

“Not only will this help to alleviate pressure on the national grid, but also ensure business continuity and realise gains in the form of a 125% deduction in tax in the first year for all renewable energy projects.”

Other state-led interventions for small business include government’s proposal to provide solar-related loans for small and medium enterprises on a 20% first-loss basis.

“This means going forward that small businesses will be able to get loans from finance providers where the National Treasury will assume 20% of the initial loss to mitigate the total risk for lenders and hopefully make these loans more accessible to a wider base.”

Lang says this development will likely form part of the proposed Energy Bounce Back Scheme, set to launch in April 2023, an extension of the Bounce Back scheme initiated during the pandemic years to assist SMEs in recovering Covid-19-related losses.

He remains hopeful that the new solar-directed slant of the scheme will attract more uptake than its predecessor, which saw only R140 million in loans approved and R77 million of the proposed R15 billion used.

In addition, the budget also allocated R2.8 billion to the department of small business development as part of a fund to support 12 000 township and rural enterprises, but how this will happen is still unclear, but Lang says it can be used to make a meaningful impact on informal SMEs and the economy by helping them to be formalised and achieve the dual purpose of providing more support and regulatory protection to small businesses, while expanding the tax base.

Lang says he would have liked any forthcoming adjustments to the Employment Tax Incentive (ETI), a policy that should be revised as a way of directly addressing the problem of record-high youth unemployment.

He hoped for another increase over and above the maximum monthly value of R1 500 and expanding the age bracket to 35.