.png)
Depreciation is simply the decline in an asset's value over time. It is a common accounting practice that allows businesses to recover the cost of their assets over their useful life. By depreciating their assets, businesses can deduct a portion of the cost from their taxable income each year, reducing their tax liability.
When it comes to solar panels, businesses have several options for depreciating their investment. In this article, we will focus on the Modified Accelerated Cost Recovery System (MACRS) depreciation, which offers accelerated benefits in the first year.
Under MACRS depreciation, the recovery period for solar systems is typically five years. This means that businesses can recover the cost of their solar investment over a five-year period through depreciation deductions.
The depreciable basis for solar panels is reduced by one-half of the solar tax credit amount allowed. For example, if the solar tax credit is 30%, the depreciable basis would be 85% of the total cost. This reduction in basis allows businesses to take advantage of the tax credit while still benefiting from depreciation.
It is important to note that the depreciable basis may vary depending on the year of acquisition. For property acquired after September 27, 2017, and before January 1, 2023, taxpayers were allowed to deduct 100% of the cost basis in the first year. This percentage gradually decreases to 0% by 2027.
Unlike the Investment Tax Credit (ITC), which reduces the depreciable basis, the Production Tax Credit (PTC) does not impact the depreciable basis for solar panels. The PTC is an alternative incentive that pays a set amount per kilowatt-hour of electricity generated from renewable sources over a ten-year span. While the ITC is more commonly used for commercial solar installations, the PTC may be beneficial for utility-scale systems.
The Tax Cut and Jobs Act brought significant changes to how solar depreciation can be claimed on the federal level. Prior to 2023, businesses could depreciate 100% of the cost basis in the first year. From 2023 onwards, businesses can depreciate 80% of the cost basis in the first year, with the remaining 20% following the MACRS schedule. This 20% reduction will continue to decrease by 20% each year until it reaches 0% in 2027.
Businesses may also be eligible for state tax savings, depending on the tax laws in their respective states. State tax savings are calculated based on the depreciable basis and the applicable state tax rate. These savings are spread over the five-year MACRS schedule, providing businesses with additional financial benefits.
Let's consider an example to better understand how commercial solar panel depreciation works. Suppose a business invests in a solar system with a total cost of $300,000 before incentives. Taking into account the 30% federal solar tax credit, the depreciable basis would be $255,000 (85% of the total cost).
Assuming a federal tax rate of 24% and a state tax rate of 7%, the business would be able to deduct $48,960 in federal tax savings in the first year. This represents 80% of the depreciable amount. The remaining $12,240 follows the MACRS schedule.
The state tax savings would amount to $17,850 spread over the five-year MACRS schedule. The total savings from depreciation in this example would be $79,050, which is approximately 26.3% of the solar system's cost.
Here's a breakdown of the depreciation savings over the recovery years:
These tax savings from depreciation can significantly reduce the payback period of the solar investment and increase the return on investment (ROI). Businesses can use these savings to reinvest in their company or pay down the principal of a loan.
Depreciation is a valuable financial incentive that allows businesses and farms to recover the costs of their solar investments over time. By depreciating their solar panels using the MACRS schedule, businesses can take advantage of accelerated benefits in the first year. The reduction in the depreciable basis due to the solar tax credit and the potential savings from state tax incentives further enhance the financial benefits of commercial solar panel depreciation.
If you are considering investing in a solar system for your business or farm, it is important to consult with your accountant to understand the specific depreciation rules and regulations that apply to your situation. By leveraging the power of depreciation, you can maximize the affordability and sustainability of your solar investment, ultimately saving money and reducing your carbon footprint.
.png)