How to Calculate Depreciation on Solar Panels

How To Calculate Depreciation On Solar Panels

A solar panel system offers many benefits for business owners. It provides access to tax incentive programs, decreases monthly costs through energy independence and contributes to a desirable public image. If you’ve avoided solar power because of the associated costs, your mind might change given the depreciation benefits.

Investing in solar doesn’t need to be a financial burden on your company. Here’s how commercial solar depreciation can make it an affordable choice for you.

What Is Depreciation? 

By definition, depreciation is the diminishing value of an asset over time due to regular wear and tear or obsoletion. Taxpayers can account for depreciation when they file their annual taxes, reducing their tax liability. This process can result in significant savings. Many tangible and intangible types of property can depreciate as long as they have a useful lifespan longer than a year. 

A few examples of depreciating property include: 

  • Buildings
  • Machinery
  • Vehicles
  • Furniture
  • Equipment
  • Patents
  • Copyrights
  • Computer software

Taxpayers have to use the property to produce income to take the deduction on their taxes. If they use the property for both business and personal reasons, they can only deduct based on its business-related use. Once the person has recovered the property’s cost or retired it from service, it’s no longer depreciable.

Advantages of Depreciation for Businesses

Because deductions related to depreciation only apply to those who earn money from the property, depreciation mainly applies to businesses. By deducting depreciation, a company can spread out the cost of gaining assets over time. It also allows for a more accurate measure of profits and revenue, which is important for accounting, reporting, and decision-making processes. 

Through depreciation, businesses can: 

  • Recover assets’ costs over their useful life span
  • Generate tax savings
  • Keep accurate revenue records

Modified Accelerated Cost-Recovery System (MACRS) for Solar Projects 

 

Solar Savings For Commercial Buildings

Any business with solar power can use commercial solar system depreciation. While expense depreciation can take a few different forms, special rules apply to solar panels. Because the federal government seeks to incentivize businesses using solar technology, it offers a desirable depreciation schedule. For instance, solar system depreciation falls under a five-year plan for companies. 

Taxpayers can take advantage of the Modified Accelerated Cost-Recovery System (MACRS), an accelerated depreciation model. This depreciation schedule allows you to claim more significant portions in earlier years, offering a more substantial immediate reduction in federal tax liability.

The MACRS depreciation schedule allows businesses to keep solar installation costs manageable, as accelerated depreciation for solar projects reduces the immediate financial burden of investing in solar. Note that the Internal Revenue Service (IRS) accounts for half of the available tax credit, so you can depreciate the cost of your solar panels after subtracting half the federal tax credit amount. 

Tax Cuts and Job Act (TCJA)

Due to President Donald Trump’s Tax Cuts and Jobs Act of 2017 (TCJA), enhanced bonus depreciation deductions are available for qualifying MACRS property placed in service before January 1, 2023. TCJA allows for 100% depreciation of solar panels and systems in the first year of service of a commercial solar system versus over five years. TCJA temporarily allows 100% expensing for business property acquired and placed in service after September 27, 2017 and before January 1, 2023. The 100% allowance decreases by 20% per year after 2022 and expires January 1, 2027.

 

 

Example of Calculating Accelerated Depreciation Solar

Because federal tax laws can be confusing, you may want to review an example to help you further understand the solar panel depreciation rate.

Let’s say you install a solar system in 2021 that costs $300,000. That makes you eligible for the federal solar tax credit of 26%, as well as the MACRS depreciation schedule. First, you’ll reduce half of the solar tax credit from the total cost, which is 13%, leaving 87% of the cost. Here’s the equation to follow: 

  • Cost of Solar System × .87 = Amount You Can Depreciate 

Given a system costing $300,000, the numbers would be 300,000 x .87 = 261,000.

The amount you’ll use to calculate depreciation value will be 261,000. Then, you’ll need to know the federal and state tax brackets you fall into. For this example, we’ll say your federal tax rate is 24% and your state tax rate is 7%. Multiply the amount you can depreciate by your tax rates as follows: 

  • 261,000 x .24 = 62,640 for federal savings
  • 261,000 x .07 = 18,270 for state savings

Here, you can take advantage of 100% of the federal tax savings in the first year and the state tax savings over five years. In this example, the total savings from depreciation is $80,910, which is about 27% of the system’s cost. In other words, when you invest in solar, you can enjoy substantial tax savings to mitigate the upfront cost. Depending on your solar expenses and tax bracket, you may save over a quarter of the system’s cost. 

Remember to keep an eye on solar tax credit amounts, which may change in the coming years. This way, calculating accelerated depreciation for solar will be as accurate as possible.

Benefits of Going Solar for Companies

Using the MACRS solar tax depreciation schedule can make a solar investment affordable for your business. That’s significant, as investing in solar has many benefits for companies of all sizes. Here are some of the reasons you may want to install a solar system. 

Federal Tax Credit 

The federal tax credit is a major incentive for businesses, reducing tax burdens by significant amounts. It allows for a dollar-for-dollar reduction in the amount of tax you owe, based on an established percentage. The percentages vary based on when you install the system. Your state may offer additional state tax credits, as well. 

Depreciation 

As mentioned above, depreciation on solar panels makes the investment more affordable by allowing you to reduce your tax burden. The accelerated depreciation schedule means first-year costs are much more manageable. 

Solar Renewable Energy Certificate (SREC) 

Solar Renewable Energy Certificates (SRECs) are another considerable financial advantage. In some states, utility companies have to generate a specific portion of their energy from renewable energy sources (RECs). In many of these states, a designated amount of the certificates have to come from solar specifically, not just any renewable energy source. 

This concept can make your solar power even more valuable, as you own one SREC for every megawatt-hour your solar system produces. Utility companies buy your certificates to meet their required quotas. In some cases, you can earn hundreds of dollars as a result.

Energy Independence

Owning solar panels also offers you energy independence, which can end up saving you a great deal of money over time. Fossil fuel and natural gas prices fluctuate without warning from month to month and year to year, complicating financial planning for a business. When you have solar panels, you create your own energy, which decreases your reliance on utility companies and their unpredictable prices. 

Thinking About Going Solar? Contact KC Green Energy to Make the Switch

Government programs have made solar attainable for many businesses. While solar is a major investment, it offers unignorable returns and advantages. Thanks to tax credits and an accelerated depreciation schedule, initial costs are much less burdensome. If you’re thinking about going solar, consider KC Green Energy. 

At KC Green Energy, we specialize in the expert design and installation of solar electric energy systems. We’ll help you maximize your return on investment with a custom-designed solar system. Contact us today — we’re happy to answer any of your solar-related questions or offer you a free quote!

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