Summary:
Many governments offer depreciation-based tax incentives—such as MACRS (Modified Accelerated Cost Recovery System) and Bonus Depreciation—to reduce the tax burden on commercial solar investments. These incentives help businesses recover the cost of their solar systems more quickly and increase the overall financial viability of their projects.
OpenSolar allows you to incorporate these tax benefits directly into your proposals for commercial customers.
Note: Tax laws are complex. Always advise customers to consult with a qualified tax professional before making financial decisions based on these incentives.
Table of Contents
- How are Depreciation-Based Tax Benefits Calculated?
- How to Set up a Depreciation-Based Tax Incentive in OpenSolar
- How to Apply Tax Depreciation Benefits to Your Project
- Where to Set the Federal and State Tax Rates
How are Depreciation-Based Tax Benefits Calculated?
Let’s explore a simplified example using state-level MACRS depreciation:
Scenario:
System Cost: $100,000
ITC (Investment Tax Credit): 30%
State Tax Rate: 7%
MACRS Schedule: 5 years
Step 1: Adjust Depreciable Basis
Reduce the system cost by half of the ITC:
Depreciable Basis = 100% - (30% × 0.5) = 85%
85% of $100,000 = $85,000
Step 2: Calculate Tax Benefit
Multiply the depreciable basis by the state tax rate:
$85,000 × 7% = $5,950 total tax savings
Step 3: Distribute Across MACRS Schedule
| Year | Recovery % | Annual Benefit |
|---|---|---|
| 1 | 20% | $1,190.00 |
| 2 | 32% | $1,904.00 |
| 3 | 19.2% | $1,142.40 |
| 4 | 11.52% | $685.44 |
| 5 | 11.52% | $685.44 |
| 6 | 5.76% | $342.72 |
You can also apply this logic for federal depreciation using MACRS and Bonus Depreciation alongside the ITC.
How to Set up a Depreciation-Based Tax Incentive in OpenSolar
Follow these steps to create a tax depreciation incentive:
Step-by-Step:
Go to Control > Other > Incentives
Click + Add Incentive
Set the Incentive Type to "Depreciation Benefit"
Configure the Following Fields:
| Field | Description |
|---|---|
| Depreciation Basis | Set to Purchase Price Excluding Tax |
| Percentage of Basis | Calculated based off the Federal Investment Tax Credit (ITC) using the following formula: (100% - (ITC(%) * 0.5)) For example, if the ITC is 30% then the Percentage of Basis should be set as (100% - (30% * 0.5)) = 85% |
| Default Tax Rate | This is the default tax rate that is used to calculate the MACRS if the tax for the corresponding "Tax Jurisdiction" (Federal/State) is NOT set in the Project Info Page. |
| Tax Jurisdiction | Overrides the Default Tax Rate to calculate the MACRS depreciation if the corresponding Federal or State tax rate is set in the Project Info Page. Use this field to enter the actual marginal tax rate of a particular customer. |
| Depreciation Per Year | Comma-separated field of depreciation recovery percentage per year. For a 5-year MACRS depreciation, this should be set as: 20, 32, 19.2, 11.52, 11.52, 5.72 Note: Enter percentages as whole numbers (e.g. for 20% enter "20) |
How to Apply Tax Depreciation Benefits to Your Project
Go to the Manage tab
Under Project Type, select Commercial
In the Design Tab:
From the left-hand Design Toolbar, apply the relevant Incentive
Note: If you've selected to also model the tax effect in the project, the tax information entered in the Manage page will override the tax information for MARCS. You can read about modeling tax effect here.
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