Established in 1986, the Modified Accelerated Cost Recovery System (MACRS) is a depreciation system in use in the United States that allows businesses to recover part of the capitalized cost of an asset for tax purposes through annual deductions. Typically these assets are bundled in different classes, each with their own set depreciation period. By allowing for accelerated depreciation on certain property, the Internal Revenue Service (IRS) is enabling businesses and individuals to recoup greater amounts early on in an asset’s life and effectively providing a maintenance allowance to cover any obsolescence or wear and tear on the property.
Currently, several renewable energy systems—including a variety of solar electric and solar thermal technologies, small wind, combined heat and power (CHP), and select geothermal systems—are eligible for MACRS depreciation schedules of five to seven years under the federal tax code. Qualifying solar PV equipment is eligible for a 5-year cost recovery period, allowing businesses to accelerate their return on their solar investment significantly.
USING ACCELERATED DEPRECIATION FOR SOLAR PROJECTS
MACRS is an important tool for businesses with depreciable assets of any kind (phones, vehicles, solar, etc.) as it provides market certainty, which drives continued economic investment. Paired with other generous incentives such as the 26% federal Investment Tax Credit (ITC) for qualifying solar systems, accelerated depreciation has helped keep installation costs low and has been particularly effective in growing the adoption of solar-electric systems throughout the United States.
Over the 5-year depreciation schedule, a business may be able to recoup anywhere from 10-25% of the solar system’s original cost using MACRS depending on a business’s tax rate. If a project is able to claim the 26% ITC and receives a credit against the business’s tax liability, the project owner will be able to deduct 87% (100% – [26% x 0.5]) of the total system cost via accelerated depreciation. The 5-year MACRS schedule is as follows:
|Recovery Year||Depreciation %|
EXAMPLE: USING MACRS ON A COMMERCIAL SOLAR PROJECT
Please note these numbers are presented in simple dollar format and do not take into consideration their Net Present Value (NPV) or the time value of money. For our calculations, we are assuming a 30% tax rate. Your business’s tax rate may vary. Total Project costs in this example are $200,000. Remember, by claiming the ITC, a project owner’s depreciation basis will be 87% of the total project costs or $174,000 in this case.
|Depreciation Basis||Recovery Year||Depreciation %||Recovered Amount|
For qualified systems placed into service after September 27, 2017, and before January 1, 2023, bonus depreciation up to 100% is available thanks to The Tax Cuts and Jobs Act of 2017. Systems and equipment acquired before September 28, 2017, and placed in service before January 1, 2018, are only eligible for 50% bonus depreciation.
For more on the history of bonus depreciation, including past extensions and specific qualifications, check out the Database of State Incentives for Renewables & Efficiency (DSIRE) website.
For more information on MACRS, see IRS Form 4562 – Depreciation and Amortization or the Instructions for Form 4562 document.
The IRS Publication 946 is also a helpful resource if you are interested in a complete guide to depreciating assets with MACRS (including a full list of asset classes).
We’re solar plus storage experts, not tax professionals. Any information in this article is meant as a high-level overview of available financial incentives in the solar industry and should not be treated as financial or tax advice. Please consult with your tax or accounting professional on MACRS and questions relating to accelerated depreciation.