Businesses encouraged to take advantage of Section 12B tax incentive for alternative power

With the threat of rolling blackouts likely to remain with us for some years to come, businesses that haven’t already geared up with alternative power solutions need to start considering their options.

Rooftop solar has become a popular choice as it requires minimal maintenance, most of its components are highly durable with a long lifespan, and energy costs reduce over time. However, the capital outlay can be a challenge. 

Jonty Sacks, a partner at alternative investments specialist Jaltech, says given the recently enhanced 12B tax incentive, fund managers are raising retail capital from taxpayers specifically to fund solar projects. 

“Traditional institutions are only able to fund a portion of a project but since Section 12B fund managers are not subject to banking legislation, we can fund an entire project. The terms we offer are also significantly more attractive.”

Property or business owners benefit from accessing Section 12B funding as no security is required. Upfront costs are minimal and the funding term can be as long as 15 years, lowering the annual payment and structuring the funding in a way that is off the balance sheet for the property or business owner. However, business owners appoint the engineering, procurement and construction provider/solar installer that will also be responsible for maintenance and monitoring.

Sacks adds: “Solar installers also benefit as they now also have access to Jaltech’s Section 12B funding for their clients or new or existing projects which they operate. This has unlocked a number of projects which simply took too long through traditional funding channels and has resulted in more business for them.

“The likelihood of Eskom supplying the South African market with reliable electricity within the next two years is remote. When they eventually achieve this, the cost of the electricity will likely be significantly higher than the cost of producing energy through solar.”

Jerome Brink, the director of tax and exchange control practice at Cliffe Dekker Hofmeyr, explains that businesses can claim a 125% deduction in the first year for all renewable energy projects with no thresholds on generation capacity. This means that irrespective of the capacity of the renewable energy assets (ie, less than or more than 1MW), a business will be able to claim the 125% deduction. This is a departure from the previous 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).

The adjusted incentive for business is available for investments brought into use for the first time between 1 March 2023 and 28 February 2025. If, for example, a renewable energy investment of R1-million is made by a business, that business will qualify for a deduction of R1.25-million. According to the National Treasury, this deduction could reduce the corporate income tax liability of a company by R337,500 in the first year of operation.

Associate Professor David Warneke, the head of tax technical at BDO, adds that if the business disposes of the item used to generate electricity from renewable sources, the current recoupment provisions in the Income Tax Act may apply. 

“In addition, if the disposal is before 1 March 2026, 25% of the cost of the item that is recovered or recouped must also be included in the taxpayer’s taxable income (recouped),” he says. DM