What is MACRS Depreciation?
MACRS (pronounced MAKERS) stands for Modified Accelerated Cost-Recovery System and depreciation is known as the reduction in the value of an asset over time due to wear and tear or normal use.
Depreciation is classified as an expense and may be deducted from your taxable income, thus reducing the cost incurred for the solar power system. Depreciation is your businesses way of recovering the costs incurred from a solar power installation.
MACRS Depreciation for Commercial Solar Details
Commercial solar power systems are eligible to be depreciated over a 5-year, accelerated rate schedule. You can find more information on IRS Publication 946: How to Depreciate Property by clicking here.
The most important detail to note is that 85% of the cost of solar is eligible for the 5-year depreciation rates. More detail on how to calculate each years depreciation expense is shown below.
If you are running a profitable business and you can clearly show that the solar power you are generating is for business use, then solar and it’s incentives may can have a strong impact on your bottom line.
MACRS Depreciation Rates (Rate Schedule)
Look at the 5-year column to find the percentages you would use to depreciate your solar installation. The chart below comes straight from the IRS Publication 946 referenced above.
How to Calculate MACRS Depreciation
We do not claim to be accountants and everyones personal or business situation is different. This example is for educational purposes only, please contact your accountant for more specific details related to your financial situation.
Example: A solar installation for a business in Boca Raton costs $100,000 and we assume our customer has a 33% tax bracket/tax rate. How do we find out how much depreciation this business is eligible for in each of the 5 years?
- We must find the depreciable basis – This is simply the gross cost of the solar installation multiplied by 85%. The depreciable basis is what’s used to calculate the amount of depreciation for each year of the 5-year schedule. $100,000 x .85 = $85,000
- Next we multiply the depreciable basis by the depreciation rate. If we are in year 1, then we use the rate of 20% for year 1 found in the chart above. $85,000 x .20 = $17,000
- Last, we multiply the yearly depreciation amount by the assumed tax rate of 33% to find the actual dollar value of the depreciation for the specific year. In our case we are using year 1 as an example. $17,000 x .33 = $5,610
- Repeat steps 2-3 using the depreciation rates in the chart above to find the actual dollar amounts for the remaining years.
This should help you understand how depreciation for solar installations works. We advise you to speak to your tax professional or get in touch with us here to learn more about how solar works for you!
DSIRE USA – MACRS Depreciation Details
Investopedia – Depreciation Explained