Depreciation Benefits for Commercial Solar Installations

There was a lot of press in December about the extension of the Section 1603 Treasury Grant program in the landmark tax legislation that passed in December, but not too much fanfare about the depreciation benefits for renewable energy, including photovoltaics.  They depreciation incentives were not only extended, but were also expanded.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law included 100% first-year bonus depreciation for certain commercial renewable energy projects placed in service September 9, 2010 (retroactively) through December 31, 2011.  The Economic Stimulus Act of 2008 had first put into place 50% first-year bonus depreciation for qualified renewable energy projects put in service in 2008.  The American Recovery and Reinvestment Act of 2009 then extended the 50% first-year bonus depreciation for the 2009 tax year.  It was restored again for 2010 through the Small Business Jobs Act of 2010.

So what does this mean?  Instead of depreciating a solar photovoltaic (PV) installation over its typical depreciation schedule of 5 years under MACRS, the cost of the project can be depreciated in the same year that it is placed into service.  However, f the property is placed in service between January 1, 2012 and December 31, 2012, the first-year bonus depreciation is stepped back down to 50%.

In order to be eligible for bonus depreciation, the project must fulfill the following requirements:

-          The property must have a recovery period of 20 years or less under normal federal tax depreciation rules.

-          The original use of the property must commence with the taxpayer claiming the deduction.

-          The property must be acquired between 2008 and 2012.

-          The property must be placed in service between 2008 and 2012.

Calculation of the Depreciation Benefit

If the owner of a PV system takes the federal investment tax credit (or grant), he must reduce the depreciable basis by one-half of the tax credit total.  The federal tax credit (or grant) for photovoltaic installations is equal to 30% and one-half of that would be 15%.  Therefore, you would be able to depreciate 85% of the total cost of the system in the first year if the system is placed into service by December 31, 2011.  Given the time value of cash, system owners will see significant tax benefits by depreciating the entire system in the first year – the more a company can expense; the less they have to pay in taxes for that year.  For more information, please consult a tax professional.

Between federal tax and depreciation benefits coupled with state and utility incentives, there has never been a better time to invest in a commercial solar installation.  Brightstar Solar is a licensed solar installer servicing Massachusetts and Connecticut.  We work with our customers to help navigate the installation process, maximize incentives, and manage all of the rebate and permitting paperwork involved.  If you have a home or business in Massachusetts or Connecticut and are interested in solar power, please contact us for a free evaluation.

{ 3 comments… read them below or add one }

Patrick Newell January 20, 2011 at 10:49 am

Nice write up Bright Star.

When you mention the time value of money, are you suggesting that the owner of the system should take the 1603 treasury grant (and therefore depreciate 85% of the system), or to pass on the grant, and accept the 30% tax credit along with 100% depreciation?


Mona January 20, 2011 at 11:36 am

Good question. I am not a tax expert and customers should always consult a professional before filing their taxes, but my understanding is that the depreciable basis does not change if you take the grant or a tax credit. If you take the grant or tax credit, you have to decrease the depreciable basis by 1/2 of the tax credit or grant total.

Let’s assume the following things:
System Cost: $100,000
Federal Tax Credit or Grant: $30,000
System Cost Less Tax Credit or Grant: $70,000
Depreciable Basis: $85,000 or ($100,000 – ($30,000)(.5)

You can depreciate 100% of the $85,000 in the first year through the most recent tax legislation even though the taxpayer will only spend $70,000 after taking the 30% federal tax incentive.

Depreciation acts as an expense and expenses decrease taxable income. Before this legislation passed, taxpayers would have to depreciate the system over 5 years. This means taxpayers can take the entire (depreciation) expense in the first year, thereby decreasing their taxable income now (rather than over a span of 5 years). That’s why I refer to the time value of money. The theory is cash is always worth more now than later.

Patrick Newell January 20, 2011 at 4:17 pm

Ok, great. We have the same understanding that regardless of the tax credit/grant election, 85% of the system cost may be depreciated. I think I had misread the paragraph in which you talk about that.

Thanks again for the writeup and the response.

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