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A Business Owner’s Introduction to Solar Tax Options

Written by Citadel Roofing & Solar | Sep. 30, 2024

A California Business Owner's Introduction to Solar Tax Credits

California and Federal Solar Incentives Can Help Business Owners Save

California is the #1 state in the country for solar adoption—and for good reason. Not only does the state host the ideal weather conditions for optimal solar production, but California offers a variety of solar incentives available to residential and commercial customers alike. With the solar incentives offered through state and federal channels, the upfront costs of getting solar have been drastically reduced. This post will cover some basics California business owners should know when installing solar. 

There are four main incentives available to California business owners:

  • The Federal Investment Tax Credit (ITC, sometimes colloquially referred to as “The Solar Tax Credit”)
    • Bonus Adders
  • Federal Depreciation
    • MACRS (Modified Accelerated Cost-Recovery System)
    • MACRS-Bonus Depreciation
  • State Depreciation
    • MACRS (Modified Accelerated Cost-Recovery System)
    • 10-year straight-line depreciation
  • And California’s Self-Generation Incentive Program (SGIP).

First, we’ll cover some of the basics around solar depreciation. Then, we’ll cover some of the basics about each available incentive.

A Note On Batteries and Peripheral Costs

When it comes to tax savings on your solar installation, you can include more costs than just the panels. When we refer to the total cost of a solar installation, this includes panels, batteries, wiring, and even roof modifications. This means your potential tax benefits could be higher than you might expect.

A Note On Taxes

It’s important to note that everyone’s tax situation is different—and we are not tax experts. Please consult with your tax advisor to explore options unique to your situation.

Understanding Solar Depreciation

Some business owners may be new to depreciation—even outside of a solar context. This section will cover some of the basics around solar panel depreciation incentives: what they are and how they benefit business owners.

What is Solar Panel Deprecation?

Solar panel depreciation is a tax incentive business owners can use to reduce their overall tax burden. As solar installations age, they drop in value. Depreciation reflects that drop and can be counted toward business expenses—reducing taxable income. The IRS provides the percentage you can reduce from your annual taxable income. This yearly deduction rate is typically referred to as a schedule.

When business owners determine how any given asset can be depreciated, they refer to IRS depreciation guidelines. One of these guidelines is called the modified accelerated cost recovery system (MACRS). Through MACRS, solar has been given a five-year depreciation schedule. The exact percentage available to claim each year is provided through the MACRS schedule. We’ll cover more details about the MACRS program later in this post.

How Does Solar Depreciation Help Business Owners?

The solar depreciation schedule helps business owners reduce their tax burden, freeing up money that would have been paid in taxes. This improves cash flow and helps incentivize business owners to invest in technologies that will benefit their business.

Different depreciation methods and options are available. However, the incentives are scheduled and predictable regardless of the chosen option. With depreciation schedules available, business owners can make longer-term financial considerations.

Business Tax Incentives for Solar Panels

Now that we’ve covered a few of the basics around depreciation, let’s review the incentives available to business owners.

Federal Investment Tax Credit

The most significant incentive available is the federal investment tax credit (ITC), a 30% tax credit of the system's total cost. 

For business owners, some qualifying situations can add additional stackable 10% “kickers” to the incentive. These add-on circumstances involve community-centric installation criteria (e.g., low-income, energy community, etc.). You’ll need to work with a tax professional to identify if you qualify for these extra incentives. 

It’s important to understand that the Federal Investment Tax is not a depreciation credit. But, the ITC is used to calculate your available depreciation basis. 

Note that the ITC is a tax credit and should not be confused with deductions. Tax credits reduce the amount owed in taxes, whereas tax deductions (like depreciation) reduce the amount that can be taxed. 

If your solar installation costs were $100,000, and you claimed the complete 30% ITC credit, you would receive a tax credit of $30,000.

Bonus Adders

Beyond the ITC, businesses can get extra credit savings for solar installations in specific areas. These are called “Bonus Adders” and can give you an additional 10% tax credit for each special condition you meet. You can save even more with these bonus credits if you install solar in low-income communities, energy communities or with domestic content. 

Speak with a tax professional to see if you qualify. To read more, you can visit the IRS resources below:

Federal MACRS

The modified accelerated cost recovery system (MACRS) details how business expenses qualify for depreciation. The schedule provides how many years a business can claim depreciation and the percentage of depreciation each year. 

For Solar, the MACRS schedule provides tax reduction opportunities for six years. 

  • Year 1: 20%
  • Year 2: 32%
  • Year 3: 19.2%
  • Year 4: 11.52%
  • Year 5: 11.52%
  • Year 6: 5.76%

The schedule refers to the percentage of your depreciable basis you can claim. Your depreciable Basis is the total amount you’ll eventually be allowed to claim as depreciation. 

Finding Your Depreciable Basis

Commercial solar customers are allowed to claim depreciation for the total cost of the system minus half of whatever was claimed with the Federal Investment Tax Credit.

For example, if your system costs $100,000, you can claim a 30% ITC credit of $30,000. Half of the ITC credit is $15,000. As such, you can use $85,000 ($100,000 - $15,000) as your system cost when calculating depreciation. This $85K is the depreciable basis, which will be used as the starting amount for all MACRS schedule calculations.

Depreciation is accounted for as a cost to your business—and as such, it reduces your taxable income each year it’s applied. With this application, you save what you would have paid in taxes each year on that taxable income reduction. For example, let’s assume you have a tax rate of 20%:

You can read more about the IRS's qualifications and policies here. Your business must have taxable income to use the MACRS incentive. We recommend working with a tax professional to explore your unique tax situation.

** Do note the IRS refers to the first and last year of all MACRS schedules as half years. As such, they refer to the solar schedule as a five-year plan (four full years and two half years). However, the business owner's depreciation schedule is claimed over six fiscal years.

Bonus Depreciation

Bonus depreciation is another method of calculating how much depreciation you can claim—and when you can claim it. This method is an alternative to MACRS. You cannot use both the MACRS schedule and Bonus Depreciation. 

Some Similarities between MACRS and Bonus Depreciation:

  • They both use the same depreciation basis calculation (total system cost minus ½ of the claimed ITC)
  • Both programs offer tax deductions based on the available depreciation basis. 

But the two programs have two key differences: 

  • Bonus depreciation provides the entire deduction in one year rather than six. 
  • The depreciation rate is based on the year the system was installed rather than just six years from the installation date. 

Having your system depreciation available now rather than over six years is a huge benefit. This means significant savings within the first year. 

However, the depreciation rate for this incentive option lowers each year. In 2022, business owners could claim the bonus depreciation with 100% of their system-basis cost. In 2024, that rate is now 60%. 

We’ll examine the same $100,000 system example, but this time, we’ll use bonus depreciation rather than MACRS. Also note that the year column reflects when the system was installed. Each business owner is only qualified for one row—based on the installation date.

As you can see, bonus depreciation is a great option, but its effectiveness is decreasing each year. Right now, choosing between MACRS and bonus depreciation is more about preference. You get slightly more with MARCS, but over six years. You get a little less with bonus depreciation, but it’s all claimed in your first year.

California State MACRS

California also allows businesses to apply MACRS depreciation schedules to their state taxes. This incentive is like the federal schedule but with your California state tax rate.

Solar Battery SGIP

The Self-Generation Incentive Program (SGIP) incentivizes homeowners and businesses to install energy storage equipment (e.g., solar batteries). The incentive was implemented to support emergency preparedness in fire-prone areas in California. 

You can see the CPUC details provided here for qualification details.

The incentive is based on both eligibility criteria and installation size. The benefit ranges from $850 per kilowatt-hour to $1,000 per Kilowatt-hour. Depending on your eligibility, this can mean that your energy storage is nearly entirely paid for.

Start Saving Today - Contact the Experts at Citadel

By taking full advantage of the incentives available, you can save up to 55% of your installation’s cost. And don’t forget, this investment also saves you money on power. 

Contact the experts at Citadel today, and let’s start exploring what solar can do for you!