Depreciation of Solar Panels
First, it’s important to note that tax incentives are different from those provided by the state and federal governments. Other than the state and deferral tax credits the most widely-known incentives for tax purposes is the solar 26% credit. Solar energy consumers are able to claim the 100% depreciation tax credit in the Tax Cut and Jobs Act of 2017. This will reduce the amount they pay as their solar equipment gets smaller over time. The following solar equipment is eligible for this bonus:
- Solar PV panels
- Inverters
- Equipment to balance the system
- Racking
- Circuit breakers
- Transformers for step-up
- Surge arrestors
- Batteries and other energy storage devices
This bonus isn’t just for solar equipment but also includes taxes and sales. The bonus is also applicable to installation costs, and indirect costs (as as you are able to demonstrate that they’re not). There are different tax incentives that are available for solar panels in different states. Some states, like California, have better incentives than others.
Solar Panel Depreciation (or solar panel depreciation) is one tax code that encourages innovations and higher investment on renewable energy. It also assists consumers in reducing the costs of installing solar panels.
Depreciation is simply the term used to describe how the value of an asset diminishes over time. Depreciation can be utilized by your company to cover the costs of assets that lose value in time.
Depreciation on solar energy isn’t accessible to homeowners thinking of moving to solar. However, it is applicable to businesses since solar energy is regarded as a business expense.
What is Depreciation?
Depreciation by definition means the loss in value that occurs over the course of time because of wear and tear or the process of obsolescence. Depreciation is accounted for by taxpayers as they file their annual tax returns to lessen their tax burden. This could result in significant savings. There are many types of tangible and intangible property that can depreciate in the event that they last for more than one year.
Here are a few examples of property that is depreciating:
- Buildings
- Machinery
- Vehicles
- Furniture
- Equipment
- Patents
- Copyrights
- Software for computers
To qualify for tax deductions Taxpayers must make use of the property for earning income. They are not able to deduct the property’s business-related use when they use it for business or personal motives. It is no longer possible to depreciate the property once the owner has paid back its cost or retired from service.
Depreciation benefits for businesses
Companies are not exempt from depreciation because it only applies to people who make money from their property. A company can deduct depreciation to divide the costs of purchasing assets over time. This allows for more precise measurements of revenue and profits, which is essential in accounting and reporting as well as decision-making.
Businesses can take advantage of depreciation in order to:
- Recover costs associated with assets’ use during their useful lives
- Tax savings
- Keep accurate records of revenue
How does the depreciation of solar panels work?
There are a variety of methods for calculating the savings from solar devaluation. A five year Modified Accelerated Cost Recovery System (MACRS) depreciation schedule is the most popular.
A simple illustration for the Depreciation Process
Let’s say that you have the solar panel that costs $100,000. The first step is to claim the 26% tax credit. It is the IRS reduces the tax credit’s base by half. It leaves (26% / 23 percent). The $100,000 price could be reduced by 13% to bring it down to $87,000. The bonus of 100% can be claimed within the first year following the installation of your solar panel. Experts suggest using the MACRS model for calculating how much your solar system’s value will decrease. Let’s say that the federal government offers 24% solar energy tax credit, while the state government offers only five percent. After subtracting the 26% solar credit it is $87,000. This is the base cost. Add the rates of the federal and state governments to find out how much you can save.
- Federal tax credit: $87,000 x 24 percent = $20.880
- Credit for State taxes: $87,700, 5 x $87,000 = 4,350
The tax incentive from the federal government can be claimed in full within of the initial year. The amount of the state tax credit you claim is dependent on how long it is to claim it.
What is the rate of depreciation for 26 percent Solar Tax Credit?
The IRS states that the depreciation base is one-half the amount of tax credits permitted. If you purchase solar in 2021, and your tax credits are 26 per cent, your depreciation base would represent 87% of the total price of solar (100 percent - [26%*.5*.5).
What are the Federal and State Savings Rates?
Businesses are now able to depreciate 100 percent of their cost basis for the first time at the federal level, due to The Tax Cut and Jobs Act. The five-year program will spread the savings of your state. The tax brackets you choose will be needed to calculate your federal and state savings. In the following example we will be using 24 per cent federal tax, and 8% state tax.
How do you calculate your solar depreciation savings?
To calculate savings, we will use the MACRS method. Imagine you purchased the solar system you want for $500,000 in 2021. It will qualify you to receive the Federal Solar 26% Incentive Credit. Since the depreciable basis is half of the tax credit amount, we’ll need to take 13% off the solar system costs (26%*.5), which leaves us with $435,000 of depreciable basis ($500,000*[100%-13%]).
We will need to divide $435,000 times 24 percent to determine federal savings. That will result in $104,400 in the first year. The $435,000 will be multiplied by 8.8 and this will result in $34,800. Your savings from the state is calculated over the 5 year MACRS calendar.
Solar depreciation is a way to save $139,200. That’s nearly 28 percent (or 27.84 percent) of the total cost of your system.
The Advantages in going Solar for Businesses
Using applying the MACRS The Solar Tax Repayment Plan will help your company afford an investment in solar. This is significant since solar energy has numerous advantages for all businesses. These are just a few of the numerous reasons to think about installing solar panels.
Federal Tax Credit
Companies can avail a variety of incentives through the tax credits granted by Congress. It significantly reduces tax burdens. Based on the percentage of tax which helps you cut down your tax liability by a dollar. The percentages will vary depending on the date when you first have installed your system. You could also be eligible to receive additional tax credits from your state.
Depreciation
Depreciation on solar panel investment makes it less expensive and less tax-exempt, as mentioned previously. The accelerated depreciation schedule makes it easier to manage the costs of your first year.
Solar Renewable Energy Certificate (SREC).
Another major financial gain is Solar Renewable Energy Certificates. Certain states require utilities to generate a certain amount of their power by using sustainable resources (RECs). Some states have a requirement that a certain amount of certificates are generated from solar energy sources only.
This makes solar power even more attractive, since you will own one SREC per megawatt-hour produced by solar power. In order to meet their quotas utilities will purchase your certificates. You could make thousands of dollars some situations.
Energy Independence
Solar panels also can provide energy independence, which could save you money over the long run. Natural gas and fossil fuel prices fluctuate from month to month and this can make the financial planning of businesses difficult. Solar panels let you create your own power and reduce the dependence on utility companies and their fluctuating price.
Why is solar investing more profitable over other equipment?
Solar investments can bring numerous benefits for businesses including lowering energy costs and preserving the environment. Additionally, you can get a significant amount of cash back within the first year due to the 100 percent bonus depreciation policy. Businesses are likely to pick the option that provides the most return. However, only solar can provide the highest return in year one. It can be used to pay for solar installation costs or be reinvested elsewhere.
Are you thinking of going Solar? Contact Barnes Solar for more details.
Many companies can now switch to solar through the help of government programs. Although solar is a significant investment, it can offer incredible results and advantages. The cost of the initial solar installation are much lower because of tax credits and an accelerated amortization schedule. Barnes Solar is an excellent resource for anyone thinking of going solar.
Barnes Solar is an expert in the design and installation of solar energy systems. By designing a system that is custom-designed will maximize the return on your investment. We are happy to answer your questions regarding solar energy and provide the price.