Maximizing Solar Investment Returns for Commercial Properties
A Guide to Federal and State Tax Incentives
Solar Incentives for Business
In today's competitive business landscape, cutting costs while maintaining sustainability is a priority for many companies. One of the most effective ways to achieve both goals is by investing in solar energy and installing solar panels. Not only can a solar power system reduce your long-term electricity expenses, but it also comes with significant tax advantages that can dramatically lower the upfront costs of installation. In this blog, we'll explore how commercial businesses can leverage the 30% Federal Investment Tax Credit (FITC) and bonus depreciation to cover up to 60% or more of their solar system costs.
Commercial Solar Investment Tax Credit
The Federal Investment Tax Credit (sometimes referred to as the federal solar tax credit or solar investment tax credit) is a cornerstone incentive for businesses considering solar energy. The FITC allows businesses to deduct 30% of the cost of installing a solar energy system from their federal tax liability. For example, if you install a solar system costing $300,000, you can claim a $90,000 tax credit. This immediate reduction in tax liability significantly lowers the effective cost of your solar investment by thousands of dollars.
Depreciation Benefits: Bonus and MACRS
Beyond the FITC, businesses can further reduce their tax liability through depreciation. The IRS allows for a method known as the Modified Accelerated Cost Recovery System (MACRS) to depreciate solar energy systems. Additionally, for 2024, businesses can take advantage of 60% bonus depreciation in the first year, followed by the remaining depreciation over the next five years according to the MACRS schedule.
However, it’s important to note that bonus depreciation is set to decrease incrementally by 20% each year starting in 2024, as part of the Tax Cuts and Jobs Act (TCJA) enacted under the Trump administration. This legislation introduced significant tax reform, including this phased reduction in bonus depreciation. Here's how it works:
2024: 60% Bonus Depreciation
2025: 40% Bonus Depreciation
2026: 20% Bonus Depreciation
2027 and beyond: 0% Bonus Depreciation
This phased reduction means that the earlier your business invests in solar energy, the greater the tax benefits you’ll be able to secure. Let’s break down how this would work for a system installed in 2024.
Calculating Your Depreciable Basis
Initial Solar System Cost: $300,000
FITC Amount (30%): $90,000
Depreciation Basis: Since you must reduce the system cost by half of the FITC amount, the depreciable basis is calculated as follows:
$300,000 - $45,000 (50% of the FITC) = $255,000
Federal Depreciation Breakdown
With the depreciable basis of $255,000, let's apply the 60% bonus depreciation available in 2024:
Federal Depreciation Basis: $255,000
Federal Tax Rate: 37%
First-Year Depreciation (60% bonus): $255,000 × 37% = $94,350
60% of First-Year Depreciation: $94,350 × 60% = $56,610
Remaining 40% Depreciated Over 5 Years:
Year 1: $94,350 × 20% (MACRS) = $18,870
Year 2: $94,350 × 32% = $30,192
Year 3: $94,350 × 19.20% = $18,118
Year 4: $94,350 × 11.52% = $10,870
Year 5: $94,350 × 11.52% = $10,870
Year 6: $94,350 × 5.76% = $5,437
State Depreciation Breakdown
State tax incentives also play a critical role. Let's consider a state tax rate of 3.6%. Applying the same $255,000 depreciable basis:
State Tax Depreciation Basis: $255,000 × 3.6% = $9,180
Depreciation Over 5 Years Using MACRS:
Year 1: $9,180 × 20% (MACRS) = $1,836
Year 2: $9,180 × 32% = $2,937.60
Year 3: $9,180 × 19.20% = $1,763.04
Year 4: $9,180 × 11.52% = $1,056.38
Year 5: $9,180 × 11.52% = $1,056.38
Year 6: $9,180 × 5.76% = $528.29
Shortening Your Payback Period
By combining the $90,000 FITC with the depreciation savings ($103,530), you can potentially offset over 60% of the total system cost. This makes the payback period for your solar investment remarkably short. Depending on your utility rates, you could recoup your investment within a few years, leaving you to benefit from significantly reduced electricity costs for the remaining 25 years of your system's lifespan.
Conclusion
Investing in solar energy is financially strategic. By taking advantage of the Federal Investment Tax Credit and depreciation benefits, commercial businesses can significantly reduce the net cost of solar installation and accelerate their return on investment. With such favorable incentives, now is the time to explore how solar can benefit your business—especially before bonus depreciation phases out. As an experienced solar panel installer, Stateside Solar Energy helps navigate available incentives.
Note: Stateside Solar Energy is a solar company, not a tax advisor. Please consult with your tax advisor to confirm your specific tax savings and ensure compliance with all applicable tax laws.
