Quick Facts about MACRS
- The Modified Accelerated Cost Recovery System (MACRS), established in 1986, is a method of depreciation in which a business’ investments in certain tangible property are recovered, for tax purposes, over a specified time period through annual deductions.
- Qualifying solar energy equipment is eligible for a cost recovery period of five years.
- The market certainty provided by MACRS has been found to be a significant driver of private investment for the solar industry and other energy industries.
Accelerated Depreciation Encourages Private Sector Investment
MACRS depreciation is an important tool for businesses to recover certain capital costs over the property’s lifetime. Allowing businesses to deduct the depreciable basis over five years reduces tax liability and accelerates the rate of return on a solar panel installation investment. This has been a significant driver for the solar industry and other energy industries.
Accelerated depreciation, along with other successful energy tax incentives such as the Investment Tax Credit (ITC), has helped fuel unprecedented growth in annual solar installations. Learn more about accelerated depreciation from Solar Energy Industries Association.
What Can Be Depreciated Under the MACRS?
Under the federal Modified Accelerated Cost Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from 3 to 50 years, over which the property may be depreciated. A number of renewable energy technologies are classified as five-year property under the MACRS, which refers to 26 USC § 48(a)(3)(A), often known as the energy investment tax credit or ITC to define eligible property.
Such property currently includes:
- A variety of solar-electric and solar-thermal technologies
- Fuel cells and microturbines
- Geothermal electric
- Direct-use geothermal and geothermal heat pumps
- Small wind (100 kW or less)
- Combined heat and power (CHP)
As shown in the figure below, MACRS allows full depreciation of the asset over five years of project life, or six tax years. Depreciation of the asset can be further accelerated through “bonus depreciation,” which provides significant tax benefits in the first year of an asset’s life. The bonus depreciation reverts from 100% of the eligible plant in 2011 to 50% in 2012. These depreciation schedules are compared to a 20-year straight-line schedule (over the first six years only) to show the relative speed at which capital can be reduced in book value in order to lower taxes payable on income.
The five-year MACRS depreciation schedule provides a tax benefit equal to about 26% of system costs on a present value basis. In comparison, straight-line depreciation provides a tax benefit value of 14% of system costs. When combined, the accelerated depreciation and the 30% ITC provide a combined tax benefit equal to about 50%–60% of the installed cost of a commercial PV system. Approximately 85% of total solar installation costs are eligible for depreciation.
A Brief History of Bonus Depreciation
In response to the economic downturn of 2008, Congress took action to further incentivize capital investment by accelerating the depreciation schedule economy-wide. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 allowed companies to claim a 100% depreciation bonus on qualifying capital equipment purchased and placed in service by December 31, 2011.
Congress included an extension of 50% bonus depreciation in early 2013 in the so-called “fiscal cliff” deal, which was scheduled to expire at the end of 2013. Under 50% bonus depreciation, in the first year of service, companies could elect to depreciate 50% of the basis while the remaining 50% is depreciated under the normal MACRS recovery period.
At the end of 2014, Congress passed a retroactive extension of 50% depreciation such that companies that placed qualifying equipment in service through December 31, 2014 were eligible for 50% bonus depreciation. In December 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015, which included a 5-year extension of bonus depreciation, including a phase-out that is structured as follows: 2015-2017: 50% bonus depreciation; 2018: 40%; 2019: 30%, 2020 and beyond: 0%.
Always check with your accountant for the latest tax laws!
Contact Rethink Electric to get a FREE solar panel consultation and quote for your commercial installation. We are your NABCEP certified solar installer servicing the entire Chicago land area and surrounding suburbs.