Tax Benefits of Adding Solar: Depreciation Deductions

Solar is a great addition for businesses looking to be more sustainable and environmentally friendly. It is also economical, thanks in part to government tax incentives, which help companies recoup equipment costs faster by reducing their tax burden. Among those incentives are special depreciation deductions rules that can push a greater amount of the tax advantage into the first year.

What is Depreciation?

Depreciation is a decline in an asset’s value over time. In accounting, it involves spreading the cost of an asset over time as its value decreases due to wear and tear or obsolescence. For tax purposes, businesses can deduct the cost of equipment purchases over a period of years by claiming depreciation, with different tax rules for different kinds of equipment.

Depreciation Benefits Offered for Solar Projects – Bonus Depreciation & MACRS

Federal Bonus Depreciation

First, a note: At Eagle Point Solar, we are solar experts, not accountants. We recommend consulting your tax professional when evaluating state or federal tax credit offerings to determine your eligibility and gain further understanding of how they work and how they can work best for you.

Generally, deductions for depreciation help businesses recover the costs of an asset’s value over a specified period of time. For solar, it is five years. Thanks to the Tax Cut and Jobs Act of 2017, however, businesses installing solar systems can choose to accelerate that even further. Until December 31, 2022, a federal 100% depreciation bonus was put into effect for purchases of solar PV panels, inverters, racking, transformers, solar-related electrical equipment, and battery storage. That means that rather than spreading it out over five years, a business could deduct 100% of the eligible depreciation in the first year, recouping the costs of the solar panel equipment much faster.

Although the 100% depreciation option is no longer available, the bonus depreciation has yet to sunset entirely. In order to qualify for 100% depreciation, a solar project must have been placed in service by December 31, 2022. The percentage dropped to 80% for 2023 and fell to 60% for 2024. It will continue to drop by 20% each year until it goes away in 2027.

Accelerated Depreciation Deductions

Many states, including Iowa, Illinois, and Wisconsin, offer a Modified Accelerated Cost Recovery System (MACRS), allowing the business to recover a portion of the cost over a specified time period through annual depreciation deductions. As stated earlier, qualifying solar equipment has a recovery period of five years. This depreciation schedule is also front-loaded, allowing businesses a more substantial immediate reduction in tax liability.

Depreciation is generally calculated by estimating that the system was installed in the middle of the tax year. This means the depreciation will be spread over six tax years, not five, with the amounts in years one and six being halved.

Keep in mind, if the project’s owner claims the Investment Tax Credit (ITC), the depreciable amount must be reduced. The total amount of depreciation a business can claim on the project drops by one-half of the tax credit amount. Therefore, if the tax credit is 30%, the total depreciation you could claim would be 85% of the total cost.

Sources:

• For more information on the federal MACRS & Bonus, see IRS Publication 946, and IRS Form 4562.  IRS Brief Overview of Depreciation
• For more information on Federal Solar Tax Credits visit the Department of Energy.
• To claim the ITC, a taxpayer must complete and attach IRS Form 3468 to their tax return. Instructions for completing the form are available at http://www.irs.gov/pub/irs-pdf/i3468.pdf