How to Depreciate Solar Panels on Your Taxes

Solar energy is one of the cleanest and most sustainable forms of renewable energy. However, setting up a solar energy system is not cheap. Fortunately, the government is one of the leading supporters of renewable, sustainable energy. The option to depreciate solar panels on your taxes makes solar energy even more affordable. The Federal and State governments offer money-saving tax incentives if you install a solar system on your residential or commercial property. Here is an overview of how it works:

Depreciate Solar Panels: Solar Equipment

First, it is worth noting that there are different tax incentives from the federal and state governments. The most commonly known is the 26% solar tax credit, apart from the deferral and state tax credits in question. The Tax Cut and Jobs Act of 2017 offers solar energy consumers the option to claim a 100% depreciation tax bonus on solar systems, essentially cutting their losses as their solar equipment depreciates over time. This bonus applies to the following solar equipment:

Solar PV panels
Inverters
Balance-of-system equipment
Racking
Circuit breakers
Step-up transformers
Surge arrestors
Batteries and other energy storage devices

Besides solar equipment, this bonus also applies to the sales and taxes on the said equipment. It also applies to installation costs and other indirect costs (as long as you can prove them). Different states also offer varying tax incentives for solar panels. However, some states (such as California) offer considerably better incentives than others.

The Depreciation Process – An Example

Suppose you install a solar energy system that costs you $100,000 in direct and indirect expenses; the first step would be to claim and deduct the 26% solar tax credit. It is worth noting that the IRS reduces the basis of this tax credit by half, so you are left with (26% ÷ 2) 13%. Consequently, you can depreciate the $100,000 cost by 13%, bringing it down to $87,000. You can then claim the 100% bonus on the first year of the solar system’s installation. Experts recommend using the MACRS model to determine how much you will depreciate. Now, suppose that the federal government offers a solar energy tax credit of 24% while the state government offers 5%. The cost came down to $87,000 after deducting the 26% solar tax credit. Use this as the base cost and multiply it with the federal and state governments’ rates to determine how much you stand to save, as shown below:

Federal tax credit: $87,000 X 24% = $20,880.
State tax credit: $87,000 X 5% = $4,350.

You can claim the whole federal tax incentive in your first year. However, you can only claim the state credit over several years, depending on the amount in question.

Minimize Costs and Take Advantage

Are you thinking of installing a new solar energy system in your residential or commercial property? Solar Optimum can help you minimize your costs by taking advantage of all available tax incentives and financing options. Get in touch today to learn more about how we can help.