Tax Benefits on Depreciable Assets for Commercial Businesses
For commercial businesses investing in renewable energy solutions, such as solar power systems with battery backup, there are significant tax incentives available that can greatly enhance your financial returns. One of the most valuable tax benefits for businesses making the switch to clean energy is the Modified Accelerated Cost Recovery System (MACRS). This system allows businesses to recover the costs of their solar energy investments through depreciation, providing substantial savings and faster payback on renewable energy assets.
In this blog, we'll explore how MACRS works and why it’s a critical part of your business’s solar investment strategy.
What is MACRS?
The Modified Accelerated Cost Recovery System (MACRS) is a tax depreciation system that allows businesses to recover the value of certain investments in renewable energy, such as solar PV systems and battery storage, over a shorter time period—typically five years. Under MACRS, businesses can write off the cost of their solar systems, which reduces taxable income and results in significant savings.
Businesses rely on policy to make long-term investment decisions. The Solar Energy Industries Association (SEIA) supports smart tax policy that drives continued innovation in the solar industry. Depreciation is one aspect of the tax code that facilitates greater investment in renewable energy and ultimately lower costs for consumers.
How MACRS Works for Solar and Battery Storage
When your business invests in solar energy or adds battery backup to an existing system, the total cost of these assets is depreciable under MACRS. Let’s break down the process:
Depreciable Assets: Solar panels, inverters, mounting hardware, wiring, and battery storage equipment are all considered depreciable assets under MACRS. Installation costs may also qualify.
5-Year Depreciation Schedule: The IRS allows businesses to depreciate these renewable energy assets over a 5-year period, which means a large portion of the system’s cost can be deducted from your taxable income during this timeframe.
Bonus Depreciation: In addition to the accelerated depreciation, the IRS allows businesses to take advantage of bonus depreciation. Under current tax laws, businesses can claim 80% of the system’s cost as a first-year deduction (effective in 2024), further reducing upfront tax liability.
Combining with the Investment Tax Credit (ITC): MACRS can be used alongside the 30% Investment Tax Credit (ITC), which allows businesses to claim 30% of the cost of their solar installation as a tax credit. After applying the ITC, the remaining 70% of the system’s cost is eligible for depreciation under MACRS.
Benefits of MACRS for Commercial Solar with Battery Backup
Reduced Taxable Income: By depreciating the cost of your solar system and battery storage over a 5-year period, you can significantly lower your taxable income. This is particularly valuable for businesses with high tax liabilities, as it can free up cash flow that can be reinvested elsewhere.
Faster Payback Period: MACRS accelerates the payback period on your solar investment. By claiming depreciation deductions in the early years of your system’s life, you can realize financial benefits sooner, helping your business recoup its investment faster.
Enhanced Cash Flow: By reducing tax liabilities through depreciation, businesses can improve their cash flow, making it easier to allocate funds to other areas of growth. This is especially advantageous for companies managing large-scale renewable energy projects.
Encourages Clean Energy Investment: MACRS, when combined with other incentives such as the ITC and local rebates, makes renewable energy a highly attractive investment. It helps businesses offset the initial cost of solar and battery storage, making the transition to clean energy more financially viable.
Example of MACRS in Action
Let’s break down a real-world example to see how MACRS works for a commercial solar system with battery backup:
Total cost of solar PV system with battery backup: $500,000
30% Investment Tax Credit (ITC): $150,000 credit (reduces taxable income by this amount)
Depreciable amount (after ITC): $350,000
Using MACRS, your business can depreciate $350,000 over five years. With bonus depreciation, 80% of this amount ($280,000) can be deducted in the first year, with the remaining $70,000 spread out over the remaining four years. This results in significant tax savings, improving your financial return on the solar investment.
Why Include Battery Backup?
Battery storage is becoming an increasingly important component of solar energy systems for commercial businesses. Not only does it provide energy resilience—allowing your business to continue operations during grid outages—but it also maximizes the financial benefits of solar by enabling you to store excess energy and use it during peak demand periods when energy rates are highest.
By including battery storage in your solar installation, you also make these assets eligible for depreciation under MACRS, further enhancing the financial viability of your clean energy investment.
Additional Considerations
Eligibility: Solar and battery systems must be installed and operational within the same tax year in order to qualify for MACRS.
Maintenance and Upgrades: Businesses may also depreciate maintenance costs and system upgrades under MACRS, further maximizing long-term financial benefits.
Conclusion: Leverage MACRS to Maximize Solar Savings
MACRS provides a powerful financial incentive for commercial businesses to invest in solar energy with battery backup, allowing you to recover your investment through accelerated depreciation. When paired with the 30% ITC, MACRS dramatically lowers the cost of transitioning to renewable energy, making solar an even smarter decision for businesses looking to cut energy costs and improve sustainability.
If your business is considering a solar investment, now is the time to take advantage of these tax benefits. Contact us today to learn how MACRS can help you reduce costs and improve your bottom line through clean energy solutions.