Investing in solar technology such as Solar Photovoltaic (PV) electricity is a great way to exponentially reduce the energy costs of your business. The right solar investment can lower your electricity and heating costs to zero — you can sometimes even reap a profit from your local energy supplier if your solar investments yield enough energy.
That, however, is not the only way that you can save with a commercial solar investment. You can also gain residual financial benefits from investing in solar by way of accelerated asset depreciation. For a renewable resource like solar, you can maximize the recovery of costs from your initial investment with the help of MACRS.
What is MACRS?
The Modified Accelerated Cost Recovery System, also known as MACRS, has been the tax depreciation system in the United States since 1986. It is used to recover the up front costs of most tangible assets over time via annual deductions created by the aforementioned depreciation. MACRS was introduced in order to create a more transparent, predictable and terminable way to depreciate assets.
How does MACRS affect my solar assets?
Under MACRS, all of your qualifying commercial solar assets will fully depreciate within five years. This greatly enhances your ability to recover the costs from your solar investment. This means that you will see the full financial benefits from your solar investment even faster.
How can my business use MACRS to depreciate my commercial solar investment?
In order to properly depreciate your solar assets with MACRS, you must take a very specific approach. Here is what you need to do:
Understanding which portion of your solar investment is eligible for depreciation
If you have claimed the 30 percent Federal Investment Tax Credit for which most solar investments are eligible, then the amount of the cost that you can depreciate changes. The depreciable amount is reduced by half of the Federal Investment Tax Credit; this brings the depreciable amount to 85 percent of the initial cost.
If you have not claimed a Federal Investment Tax Credit, then 100 percent of the initial cost is depreciable.
In December 2015, the Protecting Americans from Tax Hikes Act of 2015 was passed which modifies and extends depreciation-related provisions. As such, your solar investment is eligible for a 50 percent bonus depreciation once it’s placed in service before January 1, 2018. After that, it will phase down over a 5-year period under the MACRS accelerated rate schedule.
Bonus depreciation by year:
2015 – 2017: 50%
During 2018: 40%
During 2019: 30%
2020 and beyond: 0%
The annual depreciation amount under MACRS after the first year
In the first year claiming the 50 percent bonus depreciation, the other half is depreciated under the MACRS recovery period (remember that you must have your solar equipment placed in service before January 1, 2018, to claim the 50 percent bonus depreciation). It is important to be mindful of the number of years that your commercial solar investment has been depreciated because the percentage of depreciation each year varies greatly. Here is how the depreciation percentage changes each year:
Year 1: 20 percent
Year 2: 32 percent
Year 3: 19.2 percent
Year 4: 11.52 percent
Year 5: 11.52 percent
Year 6: 5.76 percent
Calculating the value of your depreciation each year
The amount that you save on your taxes via your commercial solar investment’s depreciation is based on your effective tax rate for the year. In order to calculate the amount that you will save, you must multiply the effective tax rate by the value of the year’s depreciation.
For example, if the dollar amount of your solar asset’s depreciation is $5,000 and your effective tax rate is 30 percent, then you would execute the following equation:
5,000 x 0.3 = 1,500
This would mean a $1,500 tax savings for the year for your business. This approach would apply to both your federal and state tax return.