How Commercial Solar Panel Depreciation Benefits Your Business
Understanding Depreciation
Depreciation is an accounting method acknowledging that assets lose value over time. In the context of solar panels, it’s a financial tool allowing businesses and agricultural enterprises to recover costs as the equipment’s value decreases. Specifically, this involves the Modified Accelerated Cost Recovery System (MACRS), accelerating all benefits to the first year.
Expertise Disclaimer
At IGS, we specialize in solar installation, not accounting. Our guidance is based on financial insights from our clients. However, we recommend consulting with your accountant for depreciation-related decisions. Note: Residential solar installations generally don’t qualify for depreciation unless they’re classified as a business expense.
Accelerated Depreciation Schedule
Solar systems are categorized under a five-year depreciation schedule, affecting the period over which you can recover your investment.
Depreciation and Solar Tax Credits
The calculation of depreciation intersects with solar tax credits. The IRS adjusts the depreciation basis to account for these credits, typically reducing the depreciable base to 85% of the total cost. Recent changes in law have also altered the percentage of cost basis that can be depreciated in the first year, with a gradual decrease anticipated until 2027.
Impact of Production Tax Credit
Choosing the Production Tax Credit (PTC), an alternative to the Solar Investment Tax Credit (ITC), does not affect your depreciable basis. The PTC is more suitable for larger, utility-scale solar systems.
Depreciation Example
Consider a solar system costing $500,000. With federal and state tax brackets factored in, substantial tax savings can be realized through depreciation. For instance, with a 24% federal tax rate and 7% state tax, the total depreciation savings could amount to a significant percentage of the solar system’s cost, greatly enhancing return on investment (ROI) and reducing payback periods.
Example of Commercial Solar Depreciation Calculation
Imagine a solar system installation costing $500,000. With the Federal Solar Incentive Tax Credit at 30%, we adjust the depreciable cost basis. We subtract 15% (half of the tax credit) from the total cost, resulting in a depreciable basis of $425,000 (85% of $500,000).
Assuming a 24% federal tax rate and a 7% state tax rate, we calculate the tax savings:
- Federal tax savings: $102,000
- State tax savings: $29,750
The total depreciation savings 26% of the total systems purchase price.
Here’s the breakdown over the recovery years:
| Recovery Year | Federal Depreciation | State Depreciation | Total Savings |
|---|---|---|---|
| Year 1 | 80% Federal | 20% State | $87,550 |
| Year 2 | 20% of remaining 20% | 32% State | $13,600 |
| Year 3 | 32% of remaining 20% | 19.2% State | $12,240 |
| Year 4 | 19.2% of remaining 20% | 11.5% State | $7,338 |
| Year 5 | 11.5% of remaining 20% | 11.5% State | $5,767 |
| Year 6 | 11.5% of remaining 20% | 5.8% State | $4,071 |
| Year 7 | 5.8% of remaining 20% | 0% State | $1,183 |
These savings help shorten the payback period and boost ROI. It’s an excellent way to reinvest in your business or reduce loan principals.