If you're considering solar energy for a commercial or industrial building, you've probably heard of the Investment Tax Credit (ITC). Thanks to the ITC, you can claim 26% of the costs of your solar photovoltaic system as a federal tax credit on your next return. Because it is a federal incentive, the ITC is available for solar panel systems everywhere in the US.
The ITC can be claimed for residential and commercial solar energy systems, but there is an additional incentive for businesses: the Modified Accelerated Cost Recovery System (MACRS). Companies can write off (depreciate) their solar energy investments in as little as five years under MACRS, even when the solar panels and other system components have a much longer useful life. This accelerated depreciation is a tax-deductible expense that improves cash flow during the first five years after adopting solar energy.
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In this article we will discuss how MACRS works for commercial solar energy systems in the US. Please remember that we are not tax experts and this is not intended to be professional tax advice. If you plan to depreciate a company-owned solar panel under MACRS, the best recommendation we can give is to contact a Certified Public Accountant (CPA).
Which solar energy systems qualify for MACRS?
The Modified Accelerated Cost Recovery System is a business incentive, which means it does not apply to residential solar systems. MACRS is available to the commercial, industrial and agricultural sectors, and several energy sources and technologies qualify for the benefit:
- Solar photovoltaic
- Solar Heat of Water
- Solar Space Heat
- Geothermal Electric
- Electric Thermal Solar
- Solar Thermal Process Heat
- Wind strength
- Biomass
- Geothermal heat pumps
- Municipal solid waste
- Combined heat and power
- Fuel cells using non-renewable fuels
- Landfill gas
- Tidal energy
- Wave energy
- Oceanic Hot Springs
- Geothermal direct use
- Anaerobic digestion
- Fuel cells using renewable fuels
- Microturbines
Solar panel systems and some other renewable technologies are classified as five-year properties under MACRS, meaning their cost can be amortized within that time frame. This improves cash flow projection for renewable energy systems, as accelerated depreciation counts as a tax-deductible expense.
Eligible systems placed in service before January 1, 2023 get an even greater benefit: 100% bonus amortization under the Tax Cuts and Jobs Act of 2018. Solar panels can be installed relatively quickly, in comparison with other types of renewable generation equipment. If you are considering solar panels for a commercial or industrial building, you can claim this benefit by acting quickly and completing the project before the end of 2022. Your solar installation will also benefit from the federal tax credit before it drops from 26% to 22%.
Can a company combine the federal solar tax credit and MACRS?
The 26% federal tax credit is a national incentive for solar energy systems in all market segments. On the other hand, MACRS is intended exclusively for projects in the commercial, industrial and agricultural sectors. Commercial solar installation can benefit from both incentives, but there are certain rules you must follow.
Because you recoup 26% of your solar energy investment within a year, the IRS decided to limit the maximum asset value you can depreciate under MACRS. In the case of solar energy, the value of the asset that you can amortize (depreciable basis) is equivalent to its total value minus 50% of the federal tax credit. The ITC will be gradually reduced in 2023 and 2024, which means that the MACRS depreciable basis will actually increase. The following table summarizes how this works:
|
Year |
Federal Solar Tax Credit |
Depreciable basis under MACRS |
|
2022 |
26% |
87% (100% – 13%) |
|
2023 |
22% |
89% (100% – 11%) |
|
2024 |
10% |
95% (100% – 5%) |
Considering a commercial solar system with a project cost of $1,000,000, these percentages would result in the following dollar values:
|
Year |
Federal Solar Tax Credit |
Depreciable basis under MACRS |
|
2022 |
$260,000 |
$870,000 |
|
2023 |
$220,000 |
$890,000 |
|
2024 |
$100,000 |
$950,000 |
MACRS has been available since 1986 and has been a key incentive for investments in renewable energy, along with the federal tax credit. Depending on the type of asset, the MACRS depreciation period varies from three to 50 years. Renewable energy systems typically qualify for five or seven years of depreciation, depending on the specific technology used in the project.
