MACRS: Modified Accelerated Cost Recovery System

When you own a business, there are myriad tax breaks and incentives you can take advantage of – and that includes certain incentives for installing a solar energy system. 

In addition to solar tax credits, businesses can also take advantage of the Modified Accelerated Cost Recovery System, or MACRS, which allows a company to recover a percentage of its costs for installing solar panels and other clean energy equipment over a period of five years.

Essentially, MACRS accelerates your return on investment in your solar panels by shortening the amount of time it takes to recoup your costs. When combined with the Investment Tax Credit, or ITC, which allows a business to claim 30% of the cost of going solar, you’ll see significant tax savings. This combined package of tax benefits allows businesses to recoup as much as 50% of their solar installation costs over a five-year period, helping reduce risk and accelerate the return on investment timetable. Employing both strategies means a business is eligible to deduct 85% of its tax basis when it comes to solar. When you add state and local incentives on top of that, the tax benefits are even more substantial. 

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.

The Modified Accelerated Cost Recovery System is a form of asset depreciation built into the federal tax code. Depreciation is valuable because it’s “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,” according to the Internal Revenue Service, or IRS. In other words, the tax code recognizes that the value of any physical asset – a car, a piece of equipment, or even solar panels–decreases over time. By depreciating an asset, taxpayers are able to take that lost value and deduct it from their taxable income, which reduces your annual tax bill.

MACRS allows business owners to claim the depreciation deduction over an accelerated schedule, by deducting higher amounts upfront and then lesser amounts down the road. The depreciation schedule depends on the useful lifespan of the asset; vehicles depreciate over five years, for example, while a warehouse can depreciate over 27.5 years.

When it comes to solar equipment, business owners can claim a depreciation deduction over five years. Each year during that period, you’re allowed to deduct a percentage of what you spent to install your solar energy system, thereby lowering your annual tax bill – a significant financial benefit. 

MACRS also works hand-in-hand with the Investment Tax Credit to give you even more tax savings. If you qualify for a 30% solar tax credit through the ITC, the depreciable basis for your solar equipment is half of the value of the ITC (15%), which means a business can deduct 85% of its tax basis with MACRS.

Let’s walk through an example: Say a business spent $200,000 installing a solar panel system. The 30% ITC credit would be $60,000, so it has to lower its depreciable cost basis by half of that (15%), which is $30,000. That $30,000 is subtracted from your original investment of $200,000, which means the remaining $170,000 is eligible for MACRS. 

The Solar Energy Industries Association (SEIA) says MACRS is “a significant driver of private investment for the solar industry and other energy industries.” Solar is an expensive upfront investment and claiming depreciation can make a substantial difference in the cost equation. You can qualify for MACRS as long as you’re the owner of “qualified facilities, property and energy storage technology,” according to the IRS. 

Another tax incentive called bonus depreciation can also be applied to MACRS. It’s also known as the additional first-year depreciation deduction. However, the bonus depreciation schedule goes down 20% every year until 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 it will continue to drop until it reaches 0% by 2027. For systems that came online after September 27, 2017, and before January 1, 2023, 100% of the costs can be claimed for depreciation.

The ROI on your solar panels increases dramatically with MACRS. It can help most businesses save 25% or more on the cost of solar. When paired with the ITC, that means saving more than 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 as much as three quarters for every dollar you spend. Reducing your tax liability every year for five years makes a significant difference when calculating your payback period for solar.

If you’re interested in learning more about how going solar can benefit your business,  you can sign up for the EnergySage Marketplace for free to get custom quotes from pre-vetted, trusted installers in your area. Our online Marketplace allows you to compare multiple quotes from different installers side-by-side so you can see what offers make the most sense for your specific situation. Our Energy Advisors are also available to speak with you at no cost and answer any questions you have about going solar.