MACRS Depreciation of Solar

How the Federal & MACRS Tax Credits Work Together

Here’s an example on how the Federal Investment Tax Credit (FITC) and the Modified Accelerated Cost Recovery System (MACRS) can be used to reduce a business owner’s tax liability when purchasing a solar PV system.

STEP 1: Federal Investment Tax Credit

In 2024, Mike, owner of Widgets, Inc, invests in a solar PV system for $100,000. The Federal Investment Tax Credit is set at 30% of the value of the system until 2032. So, Mike can subtract $30,000 immediately from the business’s tax liability.

STEP 2: Depreciable Basis

When the Federal Investment Tax Credit is claimed for a business, accelerated depreciation rules allow the full tax basis minus half of the FITC to be depreciated over a five year MACRS depreciation schedule. For Mike, the depreciable basis is $85,000, after applying the FITC (100% – (30%/2)).

STEP 3: MACRS Depreciation Schedule

The MACRS depreciation schedule starts at 80% of the depreciable basis for 2023, and declines by 20% until reaching 0% by 2027 (i.e. in 2024 the percentage will be 60%). To calculate the bonus depreciation for a solar PV system in 2023, multiply $85,000 by .40 = $68,000.

STEP 4: Accelerated Depreciation Allowance

Now to calculate the accelerated depreciation allowance of the solar PV system. Assuming this five-year recovery period, a half-year convention, and a 200% declining balance method, IRS Publication 946 Table A-1 lists the depreciation rate as 20% for Year 1. Widgets, Inc calculates its accelerated depreciation by taking the difference between the original depreciable basis and the amount claimed for the bonus depreciation and multiplying by the depreciation rate (.20). The 20% depreciation rate will be used each of the five years for a solar PV system.
0.20* ($85,000-$68,000) = $3,400

Now, let’s assume Widgets, Inc has a federal tax rate of 21%. The net tax impact of the depreciation deduction is
0.21*($68,000+3,400) = $14,994. This amount can be subtracted from the tax liability.

This chart pictured here summarizes Mike’s reduced tax liability for investing in a solar PV system at Widgets, Inc

With just federal incentives, Mike’s solar PV system has been reduced by 45%! This does not even take into account the energy savings from the system and available state and utility incentives. For more information on MACRS and other incentives for solar for business see this U.S. Department of Energy fact sheet. Reach out today for a solar quote to see how solar can add up for your Missouri or Illinois business!

Note: This explanation of depreciation of the solar asset is only for informational purposes. We are not tax professionals, please consult your tax adviser to understand how solar tax credits and incentives apply to your unique situation.