Written by Sarah Lozanova
Georgia businesses are increasingly taking advantage of solar energy. Numerous organizations are installing solar panels on manufacturing plants, medical clinics, golf courses, hotels, retail stores, office buildings, farms, and rental properties.
Calculating the net solar system cost
Rising electricity prices erode the bottom line. Solar panels dramatically lower energy costs, reducing operation costs. Determining the payback period and ROI of a solar system requires an accurate assessment of the net system costs. There are several opportunities for businesses to reduce net costs through tax benefits.
Determining the net cost involves calculating the solar tax credit, accelerated or bonus depreciation, and possibly local solar incentives in Georgia. Speak with your tax expert to determine if your business qualifies.
Let’s explore the available tax incentives for corporations.
Accelerated Depreciation
Georgia businesses can take advantage of both the tax credit and accelerated depreciation (Modified Accelerated Cost-Recovery System, or MACRS). The larger the depreciation, the smaller the tax liability. The value of the depreciation is equal to the depreciation amount multiplied by the business tax rate. Refer to the a five-year MACRS depreciation schedule to determine what portion of the solar system can be deducted in a given year (found in IRS Publication 946 Table A-1).
Year 1 – 20%
Year 2 – 32%
Year 3 – 19.2%
Year 4 – 11.5%
Year 5 – 11.5%
Year 6 – 5.8%
Bonus Depreciation
Congress doubled the amount that businesses can claim as bonus depreciation for commercial solar energy systems. Thus, businesses can apply 100% depreciation for the cost of a system in year one instead of spreading it out over a 6-year period.This 100% bonus depreciation helps offset the installation cost more quickly.
Solar Tax Credit
There is a 26 percent federal tax credit available for commercial projects. A tax credit is more valuable to companies than a write-off and is a dollar-for-dollar reduction in taxes owed. If a company installs a $100,000 solar system, the eligible tax credit is $26,000. The 26% tax credit is available for solar systems installed before the end of 2022.
Is Depreciation Calculated with the Tax Credit?
The IRS reduces the basis for depreciation by half of the value of the tax credit. If a $100,000 solar system receives a $26,000 tax credit, then businesses can depreciate $87,000 (100% – 26%/2). To determine the value of the write-off for the project, multiply $87,000 by the tax rate. If that tax rate is 24%, then the value of the write-off is $20,880 for the year the solar system is placed in service. Adjust the tax rate as needed to make the calculations accurate.
Total Solar System Cost = $100,000
Tax Credit (in 2020 and 2021) = 26%
Tax Credit Value is $100,000 x 0.26 = $26,000
Value of Depreciation is $87,000 x 0.24 (example tax rate) = $20,800
Net Solar System Cost = $100,000 – $26,000 – $20,800 = $53,120
When applying accelerated depreciation, it would be spread out over a 6-year period (and assumes a tax rate of 24%).
Depreciation Value Year 1 = $20,800 x 0.20 = $4,160
Depreciation Value Year 2 = $20,800 x 0.32 = $6,656
Depreciation Value Year 3 = $20,800 x 0.192 = $3,993.60
Depreciation Value Year 4 = $20,800 x 0.115 = $2,392
Depreciation Value Year 5 = $20,800 x 0.115 = $2,392
Depreciation Value Year 6 = $20,800 x 0.058 = $1,206.40
This information is intended to serve as informational and is not official tax advice. We recommend referring to the Department of Energy’s Guide to the Federal Investment Tax Credit for Commercial PV and speaking with a tax expert to understand how these incentives can benefit your company.
Want to learn more about renewable energy for your business? Contact Solar Plus today at 470-378-1182.