Commercial Solar with Bonus 50% Depreciation
MACRS AKA Accelerated Depreciation for Commercial Solar
May 21st 2016
People are always asking, “What is the return on investment for solar?” The calculations for the ROI on solar projects is pretty complicated and has to take in account all sorts of things like; the cost of the total system to be installed, the energy output for your solar installation, shading, the rates you are paying from your utility, interest rates on financing, and of course tax benefits.
The tax benefits for solar installations are still around from the federal government. In late 2015, Congress decided to extend the tax credit through 2022. The current rate is still at 30% for residential and commercial property. In years to come, the tax credit percentages will start to decline, and then be phased out after 2022. Solar has already reached grid parity in many markets, and it is believed that by 2022, solar will reach grid parity for all markets and a tax credit will no longer be necessary.
Let’s hope it does!!
Businesses have an added tax incentive called Modified Accelerated Cost Recovery System (MACRS) also known as Accelerated Depreciation. MACRS can be applied to lots of different equipment used in businesses: like vehicles, printers, medical devices, and of course solar modules are applicable for this as well. Those companies with the tax appetite can depreciate the value of the installed solar equipment, such that you could essentially write off the entire cost of the system in as little as 3 years… 3 years you say! YES, 3 years! Since this is the topic of this blog, lets dive into the details.
Commercial solar projects through use of MACRS have an added bonus 50% depreciation in the first year of installation for solar projects installed through the end of the year in 2017, and then follow a 6 year depreciation schedule. See that 2017 number? That means, they must be completely installed and online by the end of next year. This bonus depreciation is at a discounted price of 15% of the original installed price point. So, let’s take some ball park numbers and run through the calculations. For easy math let’s select $50k installed price, and a 33% tax rate.
Your $50,000 solar system will be eligible for a 30% tax credit of $15,000. IRS requires you to reduce your depreciable basis by 15% of the credit amount or $7,500. Thus for tax purposes, the depreciable basis is now $42,500. You can now apply your bonus 50% depreciation to this new value. So in year one, you have a tax credit value of $15,000, a bonus depreciation expense of $21,250 for a total of $36,250 worth of tax benefits in the first year for your $50k solar system. That is 73% of the total cost!
If your company has a $21,250 profit or more, then you can use the entire bonus depreciation value of $21,250 and write off this dollar amount as an expense, thus you will owe that much less on any taxes that you would owe to the federal government for those profits. If the company had a remaining profit of up to $47,000, at a tax rate of 33% you would still owe the feds about $15,000 in taxes. These unpaid taxes would thus be covered by your 30% tax credit for your solar system, and you’d owe nothing to the feds.
After the first year has passed, the remaining basis of your solar system will be completely written off following a 6 year depreciation table, and the total tax incentives exceed the total cost of your system to be installed.
So I bet you’re thinking, “This sounds like a 6 year return,” am I right? It sure does, as it sits. If your solar system were to be installed and just sit there looking pretty, then it would have a 6 year return. However, your solar system will have the added benefit of reducing your energy consumption and your total energy bill. Some clients will have demand charges as well, but we won’t discuss that during this blog post, we will stick to talking about kilowatt hour (kwh) credits. Credits.. yes credits, let’s talk about that real fast.
So, the one great state incentive that we have here in Indiana (and in most states); if you are an IPL, Duke, I&M, or Vectren customer is NET METERING. For all those who don’t know what this is, net metering is basically a revolving credit, or roll over minutes for your energy. For every kwh that you over produce, you will get an in store credit from the utility to use that energy when its needed. That could be at night time, winter time, Anytime. This also removes the need for batteries. Net metering is essentially the lifeline for the entire solar industry. So if you want to keep the industry alive, let’s keep net metering and positive energy policies in local, state, and federal government to support the solar industry.
Let’s Talk about Energy Savings.
So a 10deg tilted 20,000watt (20kw) ballasted roof top solar system can be installed for about $40-50,000*.
*Price range due to module and inverter selection, and the complexity of wiring and rooftop installation.
This solar system will produce approximately 25,000kwh per year. Thus at 10c/kwh, you’d save $2,500 a year on your utility bills. Now, most utilities are expected to have at least a 30% increase in utility bills over the next 10 years. So, in 2026 that 10c/kwh could reasonably be expected to be at 13c/kwh. So, over the next five years your savings on utility bills alone would exceed $12,500.
Let’s redo the one year Math with the utility savings:
$2,500 in energy savings
$15,000 in Tax credit
$21,250 in Bonus 50% depreciation
That is now, 77.5% savings of the total cost in the first year.
3 year Math:
$7,500 in energy savings, minimum
$15,000 tax credit
$21,250 Bonus Depreciation
$11,050 Additional Depreciative value of subsequent years
Sum: $54,800 <– THREE YEARS!
So to recap:
You’re total tax incentives alone, will exceed the total value of your solar system. In as little as three years there are enough utility savings and tax incentives to completely write off your solar system. A $50,000 was used as a starting price point, but that value can lower or higher and there is no cap. Remember MACR with Bonus 50% depreciation is set to expire at the end of 2017, and now you will understand why there are so many different solar systems popping up, and why Now, is the best time.. So, give us a call and set up a site survey, and free estimate.
Thanks for your time,