Solar bonus depreciation: What you need to know

Going solar is an expensive investment no matter how you slice it. But by properly claiming all available tax credits and incentives for your business’ solar project, you can cut your costs by as much as 50%. 

Bonus depreciation is just one of the valuable tools business owners should understand and use to reduce tax bills. It allows you to claim an immediate deduction in the first year of your solar investment rather than having to spread it out over the useful lifetime of the asset. It’s also known as the additional first-year depreciation deduction.

“Bonus depreciation is valuable to businesses because it allows them to accelerate the recovery of their costs and capital outlay,” said Kevin Brady, a certified financial planner and vice president at WealthSpire Advisors. “This allows them to redeploy capital faster and to other productive uses than would otherwise be the case.”

You recover your property costs through the Modified Accelerated Cost Recovery System, or MACRS, which allows you to depreciate the cost over of your solar installation over a five-year period. When it comes to solar, 85% of your tax basis is eligible for depreciation when you combine certain tax incentives – reducing your tax bill is one of the biggest advantages of investing in a solar energy system.

We’ll walk you through how combining the Investment Tax Credit, which allows you to claim 30% of your solar installation costs as a tax credit, with bonus depreciation and MACRS, can significantly lower your tax bill, increase your return on investment, and shrink your solar payback period all at once.   

Disclaimer: This article is intended to provide an informational overview of MACRS for business owners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a licensed tax professional.

First of all, to understand how bonus depreciation impacts the cost-benefit of solar, let’s define depreciation overall: It’s an “income tax deduction that allows a taxpayer to recover the cost or other basis of certain property,” according to the Internal Revenue Service, or IRS. “It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property."  

Basically, the tax code allows you to take a tax benefit by recognizing that certain types of expenses and other physical assets will decrease in value over time, such as a car or in this case, solar panels. So, if you own a business, you can depreciate the value of your solar panel system over five years. At the end of the day, depreciation reduces your taxable income, so you owe less money to Uncle Sam when it comes time to file your annual taxes.

The way depreciation applies to solar changed with the Tax Cuts and Jobs Act of 2017. It allowed businesses to fully deduct 100% of the cost of installing solar between 2017 and 2022. However, the maximum amount allowed to be deducted in the first year is now being reduced every year by 20% until it phases out entirely in 2027 This means that for systems placed into service in 2023, businesses can claim an 80% deduction. In 2024, it’s a 60% deduction, and in 2025 it will be 40%.

The good part is that the bonus depreciation schedule can be paired with another existing tax credit to provide even further savings. The Investment Tax Credit, or ITC, allows businesses to claim a tax credit of up to 30% of the installation cost. 

With the ITC, the depreciable basis for your solar equipment is half of the value of the ITC (15%). This means as a business owner you can deduct 85% of the property’s (your solar panels) tax basis with MACRS. 

To calculate the specific tax benefit of bonus depreciation for a solar project, there are three variables you need to know: the cost of your solar project (in dollars), the value of the federal ITC (30%), and your company's corporate tax rate.

As we explained, if you’re taking advantage of the federal solar tax credit, you’re required to subtract half the value of the ITC (15%) from the value that you depreciate, and subtract that from the cost of your solar panel system. In other words, you get to depreciate 85% of the cost of your solar panel system. From there, the tax benefit you receive is based on your corporate tax rate.

For example, if you installed your solar panel system in 2023 and it cost $100,000, the ITC is at 30%, and your corporate tax rate is 37%, then the depreciation benefit will be around $30,000 in the first year: $100,000 (the cost of the system), 85% (the value you can depreciate if you take the ITC), 37 % (assumed corporate tax rate). You can then continue deducting 20% from your taxable income for a five period until you hit 0% in remaining deductible income. That’s why bonus depreciation is so valuable – applying bonus depreciation with MACRS essentially doubles what you can claim when it comes to solar tax incentives. 

These savings also don’t take into consideration reduced operating costs created by generating power on site, instead of paying a full electric bill, which makes the prospect of going solar even more valuable for your business.  

EnergySage doesn't just help homeowners go solar; we also provide quotes for businesses and nonprofits. With tax benefits like the ITC and bonus depreciation, solar is a no-brainer for business owners due to its rapid payback period and high return on investment. To get started with solar quotes for your business, sign up for a free account today on the EnergySage Marketplace, and we'll help you navigate your solar options.