MACRS Solar Accelerated Depreciation
What is the MACRS Depreciation Benefits of Solar Panels?
MACRS Depreciation is an economic tool for businesses to recover certain capital costs over the solar energy equipment's lifetime. Allowing businesses to deduct the appreciable basis over five years reduces tax liability and accelerates 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.
This article breaks down the basics of MACRS tax depreciation and bonus depreciation so it's easier to understand. At any moment, you can sign up for a free consultation to get your lingering questions answered.
How To Use MACRS to Depreciate My Commercial Solar Investment?
Qualifying solar energy equipment is eligible for a cost recovery period of five years. For equipment on which an Investment Tax Credit (ITC) 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 percent 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 maintain a 30% tax rate. Your personal rate will likely vary. Understanding which portion of your solar investment is eligible for depreciation is important to know.
Sample of Depreciation Benefit - 5 Year MACRS Table
Our examples are based using an $100,000 example solar energy project. Please remember the 1) taxable basis is reduced by half of the 30% Investment Tax Credit and 2) this process repeats each year using a different percentage. Please consult one of our representatives for specific details.
Bonus Depreciation on Solar Panel Projects Explained
Under 50% bonus depreciation, in the first year of service, companies could elect to depreciate 50% of the basis while the remaining 50% is depreciated under the normal MACRS recovery period. 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 - 30% Bonus Depreciation
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. In Year One 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% =$136,000 and so on...)
Economics of MACRS Accelerated Depreciation
Please note that we have not considered the Net Present Value of these numbers and is 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 of going solar. Typical payback period for commercial solar projects in Oregon is 3-7 years.
We are happy to answer any questions you may have. Send us your questions!