Commercial Solar Panel Depreciation FAQ
Commercial solar installations have emerged as more than just a green initiative—they are now powerful financial assets. Solar panel depreciation stands out as a crucial lever for managing costs, optimizing returns on investment (ROIs), and accelerating payback periods. We will delve into the intricacies of how commercial solar depreciation works, with a particular focus on the Modified Accelerated Cost Recovery System (MACRS) and other critical considerations.
Understanding Commercial Solar Panel Depreciation
Depreciation serves as a linchpin for businesses and farms seeking to maximize ROI. Depreciation reflects the decline in the value of an asset over time, allowing businesses to recover installation costs as the equipment’s value degrades throughout its lifetime. For solar systems, the MACRS depreciation facilitates reduction in the taxable income associated with the solar project.
Accelerated Bonus Depreciation
A key dynamic of commercial solar depreciation is accelerated bonus depreciation, particularly in the first year of the solar system’s operation. At the federal level, businesses can take advantage of a remarkable 60% bonus depreciation in the initial year, followed by the standard five-year MACRS schedule. This empowers businesses to offset a significant portion of their tax liability within a relatively short timeframe while maintaining control over fixed costs.
Interaction with Federal Solar Tax Credits
The relationship between solar depreciation and the federal solar investment tax credit (ITC) adds complexity to the financial landscape. The Internal Revenue Service (IRS) adjusts the depreciable basis by one-half of the tax credit amount allowed. For instance, with a 30% ITC, the depreciable basis becomes 85% of the total cost. However, the regulatory environment is not static; for property acquired after September 27, 2017, and before January 1, 2023, businesses could deduct 100%, gradually decreasing to 80% in 2023 and further reducing by 20% annually until reaching 0% in 2027.
Production Tax Credit and Depreciable Basis:
Distinguishing itself from the ITC, the Production Tax Credit (PTC) follows a unique trajectory that does not impact the depreciable basis. Unlike the ITC, which provides a lump sum credit, the PTC offers a set amount per kilowatt-hour (kWh) over a ten-year span. This makes the PTC a suitable option for utility-scale solar systems, where the financial dynamics differ from smaller-scale commercial installations.
Federal vs. State Depreciation:
The Tax Cut and Jobs Act brought about significant changes to federal solar depreciation, transitioning from the ability to depreciate 100% of the cost basis in the first year to a 60% accelerated depreciation base in 2024. This rate will continue to decrease by 20% annually until it reaches 0% in 2027. However, it’s important to note that businesses can still depreciate the entire cost basis, with the remaining 40% following the standard five-year MACRS schedule.
State-level depreciation adheres to the standard five-year MACRS schedule, remaining unaffected by the federal changes. Understanding this interplay between federal and state-level depreciation is crucial for businesses navigating the financial landscape of commercial solar investments.
Example: Calculating Commercial Solar Depreciation
| Recovery Year | Federal Depreciation | State Depreciation | Total Savings |
| Year 1 | 60% Federal | 20% State | $40,290 |
| Year 2 | 20% of the remaining 40% | 32% State | $10,608 |
| Year 3 | 32% of the remaining 40% | 19.2% State | $11,261 |
| Year 4 | 19.2% of the remaining 40% | 11.5% State | $6,753 |
| Year 5 | 11.5% of the remaining 40% | 11.5% State | $4,868 |
| Year 6 | 11.5% of the remaining 40% | 5.76% State | $3,843 |
| Year 7 | 5.76% of the remaining 40% | 0% State | $1,410 |
To illustrate the practical application of commercial solar depreciation, let’s consider a hypothetical scenario where a business invests in a $300,000 solar panel system before incentives. With a 30% ITC, the depreciable basis is adjusted to $255,000. Assuming a 24% federal tax rate and a 7% state tax rate, businesses can strategically leverage solar depreciation to enjoy significant tax savings over the five-year MACRS schedule.
The federal tax savings from depreciation can be calculated by multiplying the depreciable basis ($255,000) by the federal tax rate (24%). The resulting amount, $61,200, represents the total federal tax savings over the five-year MACRS schedule. However, businesses can enjoy 60% of this amount in the first year, providing an immediate benefit of $36,720 to offset tax liability. The remaining $24,480 of the depreciable amount will follow the MACRS schedule over the subsequent years.
Similarly, state tax savings can be calculated by multiplying the depreciable basis ($255,000) by the state tax rate (7%). This yields a state tax savings of $17,850, which is spread over the five-year MACRS schedule.
When combining federal and state tax savings, the total savings from just depreciation in this example amount to $79,050. This represents a significant 26.3% of the entire solar system’s cost. The distribution of these savings over the recovery years, as per the MACRS schedule, further contributes to a shortened payback period and a high ROI.
Conclusion
Commercial solar panel depreciation emerges as a strategic financial tool that allows businesses to accelerate their return on investment. By understanding the intricacies of MACRS, bonus depreciation, and their interaction with federal and state tax credits, businesses can make informed decisions that optimize financial returns and enhance sustainability. However, it is crucial to emphasize the importance of consulting with financial professionals to ensure accurate guidance tailored to the specific circumstances of each business. To see the numbers for your business, fill out our form for a solar proposal.