Accelerated Depreciation for Commercial Solar Installations

Depreciation on solar panels is one of the easiest ways businesses and farms looking to go solar can keep installation costs down, paybacks short. and ROIs high

At a high level, depreciation is a decline in an asset’s value over time. Your business can use this to recover costs from purchases as the equipment’s value degrades throughout its lifetime.

There are a few different ways to expense depreciation, but we’re going to focus on depreciating your solar system using the Modified Accelerated Cost Recovery System, or MACRS depreciation, with all the depreciation benefits accelerated to year one.

** At Caldus Energy, we are expert solar installation professionals, not accountants. We share the most accurate financial forecast we can based on the information provided to us by our customers, before making any financial decisions on how to approach expense depreciation, we recommend checking with your accountant or CPA first.

If you are a homeowner , depreciation is not allowed on residences unless it is considered a business expense.

Depreciation can be taken for three, five, seven, or ten years, your investment’s recovery period depends on the type of investment you make. Solar systems fall under the five-year schedule.

Is Depreciation Calculated Before or After the 30% Solar Tax Credit?

Because everything has a wonderful way of being simple and easy, the answer to this question is going to be either before or after, right? Not so much. The IRS reduces the basis for depreciation by one-half of the ITC tax credit. If the tax credit is 30%, then the depreciable basis would be 85% of the total cost (100% – [30% X .5]). For example, if your solar system costs $100,000, you would be able to depreciate $85,000.

Property acquired after September 27, 2017, and before January 1, 2023, the law allowed taxpayers to take a deduction amounting to 100%. Starting January 1, 2023 the deduction amount is  80% and will continue to step down by 20% each year until it reaches 0% in 2027.Businesses can still depreciate 100% of the cost basis, but the remaining 20% will follow the MACRS schedule. 

Example: How Commercial Solar Depreciation Works

Let’s calculate the MACRS depreciation for a solar system that costs $300,000 before incentives. You’ll be able to take advantage of the Federal Solar Incentive Tax Credit (ITC) at 30%. But since we have to calculate depreciation with half of the tax credit, reducing the depreciable cost basis, we’ll have to take 15% off the cost of the system to get the basis of depreciation. We can do this by multiplying the cost by 85%, which gives us $255,000.

Next, you’ll need to know your federal and state tax brackets. We’ll use a 24% federal tax rate and a 7% state tax for this example.

To calculate federal tax savings from depreciation, multiply the $255,000 by 24%. Because you can take advantage of 80% of this in the first year, you’ll enjoy $48,960 in tax savings the year that your solar system is placed into service. The remaining $12,240 of the depreciable amount will follow the MACRS schedule.

To get state savings, multiply $255,000 by your state tax rate, which in this case is 7%. You’ll get $17,850 spread over the 5-year MACRS schedule.

That means the total savings from just depreciation would be $79,050. In this example, that’s 26.3% of the entire solar system’s cost!