In many jurisdictions, local, state or federal governments offer businesses depreciation-based tax incentives to encourage the adoption of solar. At their core, these incentives allow businesses to expense a larger portion of their investment in solar to reduce their tax liability.
In the United States, many commercial customers can take advantage of Modified Accelerated Cost-Recovery System (MACRS) as well as Bonus Depreciation to reduce their federal taxes (here's a great summary from the U.S. Department of Energy) in addition to other incentives to reduce state or local taxes. (Taxes are complicated! Please consult a tax professional or encourage your customers to do so, prior to making any promises to customers.)
OpenSolar allows our users who are serving commercial customers to incorporate all of these incentives into their proposals for commercial customers.
How are depreciation-based tax benefits calculated?
Let's use the example of a solar system that cost $100,000 and calculate the depreciation benefits on your state taxes, assuming your state tax obligations is 7% and using a typical 5-year MACRS depreciation schedule.
(Note that state MACRS can often be faired with the Federal Investment Tax Credit (ITC), federal MACRS, and federal Bonus Depreciation but we'll just focus on state MACRS in this example).
First, you will need to reduce the project's depreciable basis (i.e. the cost of the system) by half of the value of the ITC. For example if the ITC is 26%, the depreciable basis is: (100% - (26% * 0.5)) = 87%. Therefore the business owner will be able to deduct 87% of the total system cost via MACRS (i.e. $87,000). To get the actual savings we multiple the $87,000 by your state tax of 7%. This gives us $6,090 spread over the 5-year MACRS schedule shown below:
|5-Year Depreciation Recovery % per Year||Recovery Percentage||Annual Benefit|
How to Set up Depreciation-Based Tax Incentive on OpenSolar?
Go to Control > Other > Incentives and create a new incentive with type as "Depreciation Benefit".
There are 5 fields you will need to set:
|Field Name||What to set as to model a typical MACRS benefit:|
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 26%, then the Percentage of Basis should be set as: (100% - (26% * 0.5)) = 87%
|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.
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 percentages 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").
Example Shown Below:
Where to Set the Federal and State Tax Rates
The Federal and State Tax Rates can ONLY be set if the project is set to Commercial in the Info Page.