Business & Home Tax Savings With Solar: The Details
Hello and welcome back. This will be a multi-part series on how to save money with Solar, and we will be discussing taxes in as clear and painless way as possible. This article will cover a broad overview of MACRS and the ITC which are 2 large benefits that can save you a considerable amount. I'm Kota from New Dawn Solar, and today we're going to be discussing how your business can save money through solar energy. MACRS (the Modified Accelerated Cost Recovery System) is a depreciation method supported by the United States Internal Revenue Service (IRS) for tax purposes. It allows businesses to recover the costs of certain assets that have lost value, including solar energy systems, over a specific period of time through annual deductions. This allows you to reduce your overhead even more if you've already purchased a system and are looking to save a larger sum of money.
Tax credits and depreciation can be confusing sometimes. We highly recommend consulting with a tax expert about these incentives, so you can be aware of all the benefits and rules that apply. We will also provide a link in the description for the IRS Publication 946 (2022), How To Depreciate Property. For clarity: MACRS only applies to Businesses, and is not for individual use like the Solar ITC.
Here is an example of how the math works: Let's say you start construction for a $10,000 solar (PV) system, and have it in service prior to 2032. Your solar system is eligible for the 30% ITC. When the Tax Basis (the money you've spent) is $10,000 then the 30% ITC reduces tax liability by $3,000 dollars. This tax credit can be carried forward, for up to 20 years. This isn't bad for an asset where the first ever manufactured modern prototype is STILL outputting electricity six decades down the line.
MACRS can be stacked on top of the reduced tax liability you receive from purchasing solar with the the Federal Solar Investment Tax Credit (ITC), which has been extended to 2032, at 30%. You'll still have to pay this money up front, but that 30% savings of money you have spent on solar can all be claimed and applied to your taxes for a 20 year period until 2032, which is 9 years from now from this time of writing. That's 9 years to plan and take advantage of 2 decades of tax savings. Many solar sales people push the urgency of this- the beauty in reality is that it's a slow burn that can save you a considerable amount on energy and taxes.
After your purchase, you get to depreciate it over 5 years using the federal Modified Accelerated Cost Recovery System (MACRS). The IRS only allows you to depreciate half of your tax credit, so from our previous example, that would be $150,000 out of $300,000. This reduces your taxable income by $850,000 ($1,000,000 - $150,000 = $850,000). This is going to compound. Using the current tax rate of 30%, you'll get an additional $255,000 in depreciation savings over 5 years.
You can also elect a claim for the full depreciation in a single year (The example above was $255,000, but this percentage OR dollar amount might not apply to you! These credits are on a case-by-case basis, and a tax accountant will be more qualified to speak to this). The tax cuts & Jobs act in 2022 increased bonus depreciation to 100% in the first year for eligible projects commissioned and put into service between 2022 and 2032.
In addition, some states offer additional tax credits for solar PV installations. With state credits you will be able to reduce your tax liability for state taxes similar to the federal depreciation schedules. Incentives vary by state. Your ROI to break-even could be as low as 5-6 years. Everything after that period would be putting money back in your pocket, without including selling the power back to the grid.
This will be a multi-part series that will go more in-depth on MACRS as time goes on, so stay tuned if this article has been helpful .We hope that this information is useful to you for upcoming tax seasons, and for reducing overhead. As always, thank you for reading.