Installing a solar energy system at your business is a significant investment, but one that can provide substantial financial returns. You can slash your solar costs by up to 50% or more by claiming all available tax credits and incentives. Two key tools businesses can leverage are bonus depreciation and the Modified Accelerated Cost Recovery System (MACRS).
Key Points:
- With bonus deprecations your total savings is the same
- The earlier you install your system with bonus depreciation the more you save up front
- If cash flow or immediate tax relief is important, installing sooner (while bonus depreciation is higher) is more advantageous.
Recent Updates
For qualifying solar systems acquired and placed in service after January 19, 2025, businesses can now claim 100% bonus depreciation in the first year.
What is Bonus Depreciation?
Bonus depreciation allows businesses to claim an immediate tax deduction for a large portion of their solar investment in the first year, rather than spreading the deduction out over the system’s lifetime. It’s a valuable incentive that lets you recover your capital investment faster.
“Bonus depreciation is a great way for businesses to accelerate the return on their solar investment,” said Usman Noor, owner at 8MSolar. “By taking that big deduction up front, you free up capital to reinvest in your business much sooner.”
How Bonus Depreciation Has Changed
The Tax Cuts and Jobs Act of 2017 initially set a phasedown schedule for bonus depreciation. However, recent federal legislation has reinstated the 100% bonus depreciation for qualifying property, including solar energy systems, that are acquired and placed in service after January 19, 2025.
The previous phase-down schedule was:
2023: 80% deduction
2024: 60% deduction
2025: 40% deduction
2026: 20% deduction
2027 onwards: 0%
Combining Bonus Depreciation with the ITC and MACRS
In addition to bonus depreciation, businesses can claim the solar Investment Tax Credit (ITC). The ITC allows you to claim 30% of your solar installation costs as a tax credit. This credit can be further increased by an additional 10% for using domestic content and another 10% if the project is located in an “energy community,” potentially bringing the total credit to 50%.
When you claim the ITC, you must reduce the depreciable basis of your solar asset by half the ITC amount. So with the standard 30% ITC, your depreciable basis is reduced by 15% to 85% of the system cost. You then recover this 85% through bonus depreciation and MACRS depreciation. MACRS allows you to depreciate your solar investment over a five-year schedule.
By combining bonus depreciation, the ITC, and MACRS, you can dramatically reduce your business’s tax liability in the first year of your solar investment and accelerate your system’s payback period.
Calculating Your Depreciation Benefit
To calculate your specific first-year depreciation benefit, you need to know:
- The gross cost of your solar installation
- The ITC percentage (currently 30%, with potential for more)
- Your business’s effective tax rate
Here’s an example:
Year: 2025
Solar system cost: $100,000
ITC: 30%
Corporate tax rate: 21%
Calculation for depreciable basis:
$100,000 x 85% (100% cost – 50% of 30% ITC) = $85,000
Your first-year bonus depreciation amount is:
$85,000 x 100% (2025 bonus depreciation rate) = $85,000
Calculate your tax savings:
$85,000 * 21% (corporate tax rate) = $17,850
So in this example, you would save $17,850 on your taxes in the first year thanks to bonus depreciation. The total tax savings from depreciation is achieved in the first year, providing maximum upfront cash flow.
Starting in 2027, bonus depreciation will no longer apply. Businesses will instead use the standard 5-year MACRS depreciation schedule for commercial solar projects.
Commercial Solar Installations with 8MSolar
8MSolar provides custom solar quotes and financing solutions for solar projects for businesses and nonprofits of all sizes. With current tax incentives, solar provides an excellent return on investment and rapid payback for most organizations.
To see how much your business could save with solar, contact 8MSolar for a free consultation and quote. Our experienced team will design an optimal solar solution for your specific energy needs and budget. Don’t miss out on these valuable tax benefits – start your solar journey with 8MSolar today.