If you're a homeowner looking to go solar, the incentives available are straightforward: from net metering to the federal investment tax credit and any local utility or government rebates and incentives. Between the motivations and the declining cost of solar, the average homeowner on EnergySage sees a payback period for solar of eight years. Easy!
If, on the other hand, you're a business owner considering solar, there are additional tax incentives that help decrease the time it takes for your solar investment to pay off. The Modified Accelerated Cost Recovery System, or MACRS, is the most widely known.
Reminder: We aren't tax experts! We certainly know solar for both homes and businesses, but we recommend talking to your CPA to confirm that these tax benefits can be applied to your unique situation.
The Modified Accelerated Cost Recovery System is a form of asset depreciation. Now, you might be wondering, what exactly is depreciation? Good question! We recommend listening to what the Internal Revenue Service has to say about the issue:
"Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property."
In other words, the value of any physical asset–a car, a TV, or solar panels!–decreases over time, mainly as you use it. In the tax law, depreciation is a way to lower your taxable earnings: by depreciating the value of an asset, you take the amount that the asset had lost in value and 'allocate' it to a specific period–like a year–when that asset was providing value.
MACRS allows you to recover the costs over an accelerated period: in the case of solar, five years. So, in the case of a solar investment, you invest in solar and lower your taxes based on the amount you spent on solar over just five years. The benefit from MACRS comes from reducing the amount you spend on your taxes in a given year.
The Solar Energy Industries Association (SEIA) provides very robust guidance on how MACRS applies to businesses that invest in solar. Importantly, you need to consider the impact of the solar investment tax credit (ITC) on the portion of the investment that you can depreciate.
In particular, if you claim the ITC on your solar project (30% through 2025 for commercial businesses), you'll have to reduce the amount of the investment that you can depreciate by half of the value of the ITC you claim.
As part of the Investment Tax Credit, the current bonus depreciation schedule for solar drops 20% each year, starting in 2023. This means that for systems placed into service in 2023, the percentage of equipment that can be expensed is 80%; in 2024, it will be 60%, etc. For any systems that came online between January 1, 2018, and December 31, 2022, the percentage of equipment that can be claimed is 100%.
It's hard to know if this bonus depreciation will stick around forever, as its value (and existence) has fluctuated over the years. It's worth taking advantage of this incentive sooner rather than later.
MACRS can help most businesses save 25% or more on the cost of solar. When paired with the ITC, that means over 50% off of the upfront cost of solar. In states like California that also provide their own accelerated recovery system, the cumulative tax benefits of going solar can reduce your upfront costs by three quarters for every dollar you spend. Quite the incentive!
If you're interested in seeing how much solar can help you save at your business, get started with EnergySage today! By registering for our free-to-use Marketplace, we'll help walk you through the process of going solar, from the information our installers need to provide custom quotes on your property to actually making the switch to solar. We're happy to provide as much (or as little) support as you would like in the process. See what solar can do for you by getting started today!