Commercial Solar Project Bonus Depreciation
Commercial Solar Project Bonus Depreciation is great news for businesses investing in renewable energy.
The tax code for the United States allows businesses to take a tax deduction on the recovery of the cost of tangible property. The current depreciation method for most property is The Modified Accelerated Cost Recovery System (MACRS). The reliability of market conditions that MACRS provides gives businesses in different ranges of economic categories the ability to make long term investments. It has also been helpful in driving businesses to invest in the Solar Industry and other Renewable Energy.
How Bonus Depreciation Works
With the 50% Bonus Depreciation, owners of Solar Energy Systems are eligible to claim depreciation of half of their system after it becomes active. The remaining 50% is depreciated using the standard depreciation calculator MACRS. For example, if you have a $500,000 Solar Energy project, the taxable basis is reduced by half of the 30% Investment Tax Credit (ITC). So it is 85% of $500,000, or $425,000. The first year the 50% Bonus Depreciation helps to reduce the after ITC investment by half, from $425,000 to $212,500. The first year 20% MACRS depreciation rate gets applied to the residual half of the basis, which gains an extra $42,500 of first year depreciation ($212,500 x 20% = $42,500). After that, the MACRS rates get applied to the residual half of the basis which would be $212,500 x 32% = $68,000.
Economic Impact of Bonus Depreciation
The value of these cumulative tax savings is obvious, but it isn’t going sway a commercial solar project in either direction. With the example given, someone who invests for the tax equity can expect to see their internal rate of return increase by close to 1%. Smart solar installers and developers of solar projects can utilize this economic benefit.
This policy development can help to accelerate the growth the Solar Industry. It will also help Solar Energy to be more competitive with the oil and gas industry which traditionally has been heavily financed.
This example is a general overview. A qualified tax advisor can help determine how if Commercial Solar Project Bonus Depreciation will work for your business.