With 2012 winding down, we need to be thinking about the regulatory changes for 2013 that will affect the solar industry. One such change relates to the Modified Accelerated Cost Recovery System (MACRS) depreciation tax deductions for PV systems installed on business and investment properties.
Under the 2012 rules, business owners could take a BONUS depreciation in the first year after installation, further accelerating the tax benefits of depreciating the cost of the solar installation. The bonus rule allowed 50% of the cost basis of the system to be depreciated in the first year as a bonus (in addition to the standard first year depreciation). As of January 1, 2013, that bonus is being eliminated.
To help you produce proposals for PV systems that will be installed in 2013, we’ve created several new MACRS incentives in the ModSolar Platform. These new incentives calculate the depreciation savings for years 1 through 6 (after the installation), using the standard MACRS depreciation formulas, for your customer’s appropriate tax rate, but with no year 1 bonus deduction.
You’ll notice 4 new federal incentives that your administrators can enable in the incentives area in the settings section of the Platform:
- MACRS 15% (no bonus)
- MACRS 25% (no bonus)
- MACRS 34% (no bonus)
- MACRS 35% (no bonus)
The “(no bonus)” indicator reminds you that these incentives do not apply the 50% bonus in year 1. The % indicator refers to the corresponding tax rate. Choose the incentive that matches your customer’s rate; for example, if your customer pays a 34% corporate tax rate, choose the “MACRS 34% (no bonus)” incentive. YOU SHOULD NEVER CHOOSE MORE THAN ONE MACRS INCENTIVE FOR A PROPOSAL.
All of the MACRS incentive calculations start by determining the “cost basis” of the solar equipment. Federal regulations provide a 30% tax credit for solar installations, but the MACRS rules allow half of that credit to be added back to the cost basis. For example, if a system costs $100,000, the customer will receive a $30,000 tax credit the first year, resulting in an effective cost of $70,000 for the system. However, the MACRS cost basis will actually be $85,000 (assuming no incentives other than the federal tax credit were applied) — $85,000 is the amount that can be depreciated over 6 years. The depreciation factors for those 6 years are 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%. (Note that they add up to 100% — resulting in full depreciation after 6 years.) Thus in our example of a $100,000 system with a cost basis of $85,000, your customer will be able to claim the following deductions:
Year 1: $17,000
Year 2: $27,200
Year 3: $16,320
Year 4: $9,792
Year 5: $9,792
Year 6: $4,896
(If you add them up, you’ll see that they total $85,000.)
Those values represent the deductions that may be taken. Because these are tax DEDUCTIONS and not CREDITS, the actual net savings will depend on the customer’s tax rate. For example, a $17,000 deduction in a 15% tax bracket represents a savings of $2,550; that same $17,000 deduction in a 35% tax bracket represents a savings of $5,950.
Finally, remember that the MACRS incentives will not impact that up-front (“Year 0″) costs; they don’t “kick in” until the first time the customer files their taxes (sometime within the first year after installation).