Solar Panel Depreciation is one of the tax codes that not only drives continuous innovation and greater investments in renewable energy, but also helps consumers keep their installation costs down.
What is depreciation? In short, depreciation is a decrease in an asset’s value over time. Your business can use depreciation to recover your asset’s costs as the equipment’s value declines throughout its lifetime.
Unfortunately to homeowners that are looking to go solar, benefits of solar energy depreciation generally apply to businesses since it is considered as a business expense.
How does Solar Panel Depreciation Work?
There are a few ways to calculate your savings from solar system depreciation, but the most common method is the Modified Accelerated Cost Recovery System, or MACRS depreciation with the five-year schedule.
How is depreciation calculated considering the 26% Solar Tax Credit?
According to the IRS, depreciation basis is reduced by one-half of the tax credit amount allowed. For example, if you purchase solar in 2021, when the tax credit is 26%, then your depreciation basis would be 87% of the total cost of your solar (100% – [26%*.5]).
What are the Federal and State Savings?
Due to the new tax bill, issued by The Tax Cut and Jobs Act, businesses can now depreciate 100% of the cost basis in the first year on the federal level. Your state savings will be spread over the five-year schedule. To calculate your federal and state savings, you will need to know your tax brackets. For our example below, we will use 8% of state tax and 24% of federal tax.
How to Calculate Your Solar Depreciation Savings?
In this example, we will be using MACRS depreciation method to calculate the savings. Let’s say you purchased a solar system that costs $500,000 in 2021, which makes you eligible for the 26% Federal Solar Incentive Tax Credit. Since the depreciable basis is half of the tax credit amount, we’ll need to take 13% off the solar system costs (26%*.5), which leaves us with $435,000 of depreciable basis ($500,000*[100%-13%]).
To calculate your federal savings, we need to multiply the $435,000 by 24%, which gives us $104,400 in the first year. To calculate your state savings, we’ll be multiplying the $435,000 by 8%, which gives us $34,800. You’ll get your state savings over the 5-year MACRS schedule.
Your total saving from solar depreciation will be $139,200, which is almost 28% (27.84% to be precise) of your entire system cost! The table below shows the 5-year MACRS schedule of your solar depreciation savings:
|Recovery Year||Federal Savings||State Savings||Total Savings (Federal + State)|
You’ll get 80% of your total savings in the first year – the year when you place your solar system in service.
Why Does Investing in Solar Have More Benefits Than Investing in Other Equipment?
Businesses get many benefits by investing in solar, including but not limited to cutting down utility bills, saving the environment, and getting a good amount of money back in the first year with the 100% bonus depreciation policy. Surely, businesses would choose to invest in the assets with the best return, but only investing in solar will give them the highest return in year one, which will either go towards solar installation costs or it can be reinvested somewhere else.