In the State of Washington, if you have good solar exposure, businesses are entitled to receive solar benefits that will pay for over 105.5% of your project expense without even factoring the value of the electricity your system will be producing! In effect, the moment your system goes online you have free electricity.
Even if you decide to sell your property, you will recover all of what was invested plus a good portion of the future profit of the system. All future electricity and incentives of the system are legally added into the equity of the house. So, your investment is safe even if you sell your property.
The commercial benefits for solar can be used for photovoltaic (PV) systems installed on:
- Business property you own
- Residential or commercial rentals you may own, or
- Property that you are renting for your business in which the electrical service is in the business name (in coordination with property owner and co-benefits/sales agreement)
 This example assumes the business owner is in the 30% federal tax bracket. If lower or higher, then the total cost recovery will be less or more respectively.
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How Commercial Solar Works
Four benefits will pay for your commercial photovoltaic (PV) system in 2.5-5 years. With a special low interest solar loan it will still pay for itself in only 1-1.5 years more. Therefore, without a dollar-out-of-pocket you can now install a PV array that will not only pay for itself, but provide you with over 25 warranted years of free electricity. This opportunity, however, only last as long as the State solar allocation last.
Let's look at a small 12 kw commercial system using WA made modules that costs $30,000.
- 30% of the cost will be recovered immediately through a solar Federal Tax Credit (ITC). In other words, the next $9000 you owe in federal taxes you will not have to pay. This is guaranteed by Federal law and can be used immediately. If you do not have that kind of tax liability the first year, you simply carry it over until the next year, and so on.
- 50% can be recovered by the new WA Solar Incentive Program. You will receive $.21 per unit of electricity (kwh) that your system produces for 8 years or until 50% of the cost of your system is recovered. With Forecast Solar pricing, you will receive $15,000 over that period toward your system cost. This comes as a check from the State through your utility every Fall and it is guaranteed by State law (the rate cannot be lowered). Once you apply and are admitted into the program the full allotment is immediately set aside for your project.
- 25-35% (time .85) can be recovered using the 5 year solar accelerated depreciation benefit (MACRS). This benefit is also guaranteed by existing Federal law. For example, using a 30% income tax bracket, by depreciating all of the solar project in 5 years you would expect to recover (.85) x 30% of the project cost. In our example above that would be another $7650, which puts you at $31,650 that you have recovered of the original project cost of $30,000.
- If you elect to use the MACRS Bonus Depreciation (for 2018) you can depreciate 42.5% of the total cost of the system in the first year—great for high profit years (in this case that would be a quick $3825 in benefits in our running example). A detailed explanation of the MACRS benefit is at the end of this document.
- With the system already more than paid for by the aforementioned benefits, you still have all the electricity your system produces that you will not have to pay your utility. This is generally around 10 cents a kwh. With a 12 kw system you will produce between 11,000-14,000 kwh/year, which adds up to about $35,657 during the warranted life of most systems. Not a bad profit in which most of the returns happen in the first 3-5 years of the system. If you use a low interest solar loan, you will spend only $1000-2500 extra in interest. This means you will make about $33,000 without even spending a dollar.
- Your system will also have Net Metering. Any excess power you produce that goes into the grid will be credited to your account and supplied back to you when you need it in evening or Winter. Either way, all the electricity you produce receives the incentive payment.
2 or 3 things are critical to take advantage of this current opportunity:
- You need to have good solar exposure.
- You have to decide to do this while there is still available funds in the State solar allocations. These funds will probably be applied for and exhausted sometime late 2018. After that we must wait until late 2019 for the State Legislature to allocate more funds, which the Legislature has made very clear will be the last of the WA solar incentives. After that solar must stand on its own.
- If you decide to use a solar loan you much have adequate credit in order to originate the loan.
What is the MACRS Depreciation Benefits of Solar Panels?
MACRS depreciation is a tax tool for businesses to recover some of the capital costs of the solar installation. It allows businesses to deduct the appreciable basis over five years reducing your tax liability and accelerating the rate of return on your solar investment. The value of the MACRS Depreciation benefit can be challenging to consider without the guidance of a professional accountant that knows about solar tax issues, so we encourage you to share this with your tax preparer. You do not want to pass up this opportunity to recover some of your solar investment.
How To Use MACRS to Depreciate My Commercial Solar Investment
Qualifying solar photovoltaic systems are eligible for a cost recovery period of five years. For systems on which an Investment Tax Credit (ITC) is taken, the owner must reduce the project’s appreciable basis by one-half the value of the 30% ITC. This means the owner is able to deduct 85% of his or her tax basis.
“Depreciation” is the loss of value that occurs over time when the object purchased is used for a specific use. As a business owner, you are eligible to deduct this “loss in value” from your taxable income when used for your business. If you are running a profitable business, and you can show that the solar power you are generating is for business use (as opposed to personal use), then it may have a strong impact on reducing your bottom line. For our calculations, we assume that our clients are in the 30% tax bracket. Your personal rate will likely vary.
Sample of Depreciation Benefit – 5 Year MACRS Table
Our examples are based using a $100,000 example solar energy project. Please remember the 1) taxable basis is reduced by 85% when you also take the Investment Tax Credit and 2) this process repeats yearly using a prescribed but different percentage for each year.
Bonus Depreciation on Solar Panel Projects Explained
Currently the solar Bonus Depreciation can be used alongside the MACRS. Under the Bonus Depreciation rule companies can elect to depreciate 50% of the basis while the remaining 50% is depreciated under the normal MACRS. You must have the solar project in service before January 1st, 2018 to claim the 50% bonus depreciation. After 2018, the percentage sunsets to a lower rate. See below:
Before 1/1/2018 – 50% Bonus Depreciation
During 2018 – 40% Bonus Depreciation
During 2019 & 2020 – 30% Bonus Depreciation (Bonus Depreciation ends at the end of 2020)
In the first year claiming the 50% Bonus Depreciation, you will then reduce your post-ITC basis by half—$85,000 to $42,500—before applying the normal MACRS depreciation rate. Also, that same year you will gain an addition $8,500 in depreciation ($42,500 x 20% = $8,500). After year one, you will continue to apply MACRS rates to the remaining half of the basis ($42,500 x 32% = $13,600 and so on…)