MACRS Solar Benefits Explained
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…)
Economics of MACRS Accelerated Depreciation
Please note that we have not considered the Net Present Value of these numbers and they are in simple dollar format. Accelerated depreciation, along with other solar tax and cash incentives, such as the Investment Tax Credit (ITC), has helped significantly reduce the payback period for installing solar. For example the $59,500 of depreciation in the first year generates $17,850 savings in a 30% tax bracket. Typical payback periods for commercial solar projects in Washington is 3-7 years. Contact us at anytime with questions or to request a no obligation solar cost/benefits assessment for your business. Again, how the MACRS solar benefits might affect your specific financial situation and future business plans consult your own tax preparer.