Solar is a great way to save money on your electric bill, and it’s not just for residences. Commercial properties can take advantage of solar. While it’s a much bigger investment than going solar on your home, there are more funding programs available depending on your building and business. In this blog series, we will cover a different commercial funding program each week.
Disclaimer: The following provides an overview and does not constitute professional tax advice or other professional financial guidance. It should not be used as the only source of information when making purchasing decisions, investment decisions, or tax decisions, or when executing other binding agreements.
Modified Accelerated Cost Recovery System (MACRS)
Last week, we talked about using tax liability to save money on a solar installation. A taxpayer that claims the commercial ITC for a solar PV system placed in service can typically also take advantage of accelerated depreciation (aka the Modified Accelerated Cost-Recovery System, or MACRS) to reduce overall cost of a PV installation. To calculate income on which federal corporate taxes are owed, a business takes the difference between its revenues and expenses, plus or minus any adjustments to income. Depreciation is considered an expense, therefore, having a larger amount to depreciate during the tax year results in a smaller overall tax liability.
Whereas the ITC is a tax credit—a dollar-for-dollar reduction in taxes owed—depreciation is a deduction, meaning it only reduces a business’s taxes by the depreciation amount multiplied by the business’s tax rate. When the commercial ITC is claimed, accelerated depreciation rules allow 85% of the tax basis to be depreciated over a 5-year period (where any unused depreciation can be carried back 2 years and forward 20 years) on a 200% declining balance basis. This means that the 85% of solar PV system costs that a business can depreciate are not spread out evenly across the 5-year depreciation period; instead, the business is allowed to deduct a larger portion of this amount in earlier years, giving it the benefit of a greater immediate reduction in federal tax liability.
For more information, contact the Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224, (800) 829-1040.
For a downloadable PDF, go to: http://solaroutreach.org/wp-content/uploads/2015/03/CommercialITC_Factsheet_Final.pdf