MACRS Solar Benefits Explained

 

What is the MACRS Depreciation Benefits for Solar PV Systems?

 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 in 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 can 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 the sample client is in the 30% tax bracket. Your personal rate will likely vary. 

 

 Sample of Depreciation Benefit – 5 Year MACRS Table

 For simplicity, we will use a solar energy project that costs $100,000. Please remember, 1) the taxable basis is reduced to 85% when you also take the Investment Tax Credit and 2) this process repeats yearly using a set prescribed percentage for each year.

                                           Year 1        Year 2        Year 3       Year 4       Year 5       Year 6

Depreciation Basis           $85,000

   Depreciation %                 20.00%      32.00%     19.20%     11.52%     11.52%       5.76%

   Depreciation Expense      $17,000     $27,200     $16,300     $9,792      $9,792       $4,896

  

Bonus Depreciation on Solar Projects Explained

 Currently, the solar Bonus Depreciation can be used alongside the MACRS. Under the Bonus Depreciation rule companies can elect to depreciate 30% of the basis in 2019-2020 while the remaining 70% is depreciated under the normal MACRS schedule. You must have the solar project in service by December 31st, 2020 to claim the 30% bonus depreciation. After 2020 Bonus Depreciation ends.

 In the first year claiming the 30% Bonus Depreciation you will then reduce your post-ITC basis to 70% (from $85,000 to $59,500) before applying the normal MACRS depreciation rate.  Therefore, in that same year you will also gain $11,900 of depreciation (the remaining $59,500 x 20% = $11,900). After year one, you will continue to apply MACRS rates to the remaining 70% of the basis ($59,500 x 32% = $19,040 and so on…)

                                           Year 1        Year 2        Year 3       Year 4       Year 5       Year 6

 Depreciation Basis           $59,500 (basis after bonus depreciation)

 Depreciation %                  20.00%      32.00%     19.20%     11.52%     11.52%       5.76%

 Depreciation Expense      $11,900      $19,040     $11,424     $6,854      $6,854        $3427

 Bonus Depreciation          $25,500

  Total Depreciation          $37,400      $19,040     $11,424     $6,854      $6,854        $3427

  

Economics of MACRS Accelerated Depreciation

 Please note that we have not specifically considered the Net Present Value of these numbers, but in the earlier example of one of our former projects, we have compounded the future value of electricity by only 1% annually because utility electrical prices have historically outpaced general inflation by about 2%. Modules are warranted to degrade no more than .8% in production per year, so we factor that into the equation and therefore compound the future cost of utility electricity by only 1%.

 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, in our MACRS example the $37,400 of depreciation in the first year generates $11,220 tax savings for a 30% tax bracket.

 

Contact your Forecast Solar Consultant at any time with questions or to request a no obligation solar cost/benefits assessment for your business. Again, all the tax information in this document are generalized for describing the basic opportunities that currently exist in commercial solar. Consult your own tax preparer to learn how these solar benefits might affect your specific financial situation and future business plans