How Accelerated Depreciation Reduces the Cost of Commercial Solar

Accelerated Depreciation: Reduce Cost of Commercial Solar

VeloSolar • Updated on February 20, 2023 • [rt_reading_time postfix=”minute”] read

As we’ve discussed in previous blogs, there are many benefits to investing in a commercial solar system for your business. Solar can reduce your operating expenses by helping you control future energy costs and reducing the amount of electricity you need to buy on a daily basis; it provides resilience during outages, protecting your business from unexpected losses; and renewable energy is good for business and the environment.

Companies of all sizes can reap the benefits of solar, but for some the initial price tag may be off-putting. Fortunately, there are two ways to reduce the upfront investment costs required for a direct solar purchase – the federal solar tax credit and accelerated depreciation. We’ve covered the federal tax credit as set forth by the Infrastructure Investment and Jobs Act (IIJA) and more recently by the Inflation Reduction Act (IRA) in a previous blog, so in this article we’ll focus on depreciation.

Our goal is to give you the basics of how depreciation can lower your initial solar investment costs and make renewable energy accessible to your business. As always, we recommend you work with a tax professional that understands your specific situation.

Table of Contents

Understanding Depreciation

Depreciation is the decrease in an asset’s value over time due to regular wear and tear or obsolescence. Businesses use depreciation schedules when filing their annual taxes to reduce their tax liability and recover the cost of an asset as the value declines over its lifespan. Most companies have depreciation schedules for buildings, equipment and machinery, vehicles, and increasingly, solar energy systems.

Reducing Solar System Costs with Accelerated Depreciation

While depreciation schedules can take several different forms, special rules apply for commercial solar projects.

Solar system owners can take advantage of the Modified Accelerated Cost Recovery System (MARCS) when calculating their solar panel depreciation. First established in 1986, MARCS is a depreciation method that’s used for most property a business owns. It allows you to claim a more significant portion of your depreciation in the first few years the asset is in service. In the case of solar, it helps to reduce the immediate financial burden of the investment.

Because the federal tax code is confusing, here’s a real-world example of how it could work.

Calculating your solar panels’ depreciation

Let’s say you purchase a solar system in 2023 that costs $250,000, making it eligible for the 30% solar investment tax credit established by the IRA, as well as the MACRS depreciation schedule. Internal Revenue Service rules state that the depreciable basis must be reduced by half of the tax credit amount allowed, so the first step in calculating your depreciation schedule is to cut that 30% down to 15%. That makes your depreciable basis 85% of the total cost of the project (100% – [30%*.5]).

Then you’ll use this equation to determine the amount you can depreciate:

  • Cost of solar energy system x .85 = Amount you can depreciate

In our scenario where we’ve installed a $250,000 solar energy system, the amount you’ll use to calculate your depreciation schedule is $212,500 (250,000 x .85).

Federal and state tax brackets matter

Now, let’s assume the federal tax bracket for your business is 24% and the state tax bracket is 7%. The next step is to simply multiply the solar system depreciation amount by your tax rate like this:

  • $212,500 x .24 = $51,000 for federal tax savings
  • $212,500 x .07 = $14,875 for state tax savings

In this example, the total savings is $65,875, or 26% of the price of your solar system.

Bonus depreciation

The Tax Cut and Jobs Act of 2017 sweetens the pot even more since it declared solar systems would also be eligible for bonus depreciation. In 2023, you can claim 80% of the federal savings on your federal income taxes. That rates decreases by 20% per year until it drops to 0% in 2027 (solar projects placed in service between January 1, 2018 and December 31, 2022 were able to claim 100% of the federal savings in the year the solar panels were placed in service).

As far as we know right now, the state of Georgia, where Velo Solar is located, is maintaining 100% bonus deprecation in 2023.

This immediately offsets a significant portion of your solar installation’s cost, reducing your payback period.

The big picture

The actual reduction in your tax bill will depend on the cost of your solar system and the federal and state tax brackets under which your business falls.

In our scenario, the business would save over a quarter of the total system’s cost in depreciation alone; such a significant tax break can mitigate the upfront costs of investing in solar, making it affordable to businesses of all sizes.

As mentioned earlier, in addition to accelerated depreciation there’s also a 30% federal solar tax credit available for qualified solar systems. What happens to the bottom line when we factor the tax credit into the equation for our $250,000 solar energy project?

Take a look at the numbers:

30% federal tax credit = $75,000

80% federal depreciation savings (2023) = $40,800

100% state depreciation savings (Georgia) = $14,875

First year federal tax liability reduction = $130,675

Between the tax credit and the accelerated federal and state depreciation schedules, you’ve just covered more than half of your initial solar installation costs.

The fine print

It’s important to note that both the federal tax credit and the accelerated depreciation benefits we’ve discussed only apply if your business makes a direct purchase of a solar system either with cash or through loans. If you set up a power purchase agreement or a lease, depreciation doesn’t apply because you don’t own the asset.

solar panels with VeloSolar logo

Solar Affordability

When you consider the federal and state tax savings you’ll get in the first year of your solar system from accelerated depreciation and the solar tax credit, it becomes much easier to see how solar is incredibly affordable for businesses of all types and sizes. These methods can keep your payback period short and your ROI high.

Add to that the amount of money you can save by reducing your energy costs today and controlling your future energy costs, and the financial picture looks even brighter. Electricity prices continue to rise year over year, so it’s important to consider the costs of NOT going solar.

You also can’t ignore the benefits of resiliency. Even short power outages can be costly in terms of lost inventory and productivity. Having an on-site solar energy system ensures you can keep operations up and running.

Let Velo Solar show you how you can gain energy independence without breaking the bank.