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Depreciation of Solar Energy Property in MACRS

Businesses rely on policy certainty to make long-term investment decisions. SEIA supports smart tax policy that drives continued innovation in the solar industry. Depreciation is one aspect of the tax code that facilitates greater investment in renewable energy and ultimately lower costs for consumers.

Quick Facts

  • The Modified Accelerated Cost Recovery System (MACRS), established in 1986, is a method of depreciation in which a business’ investments in certain tangible property are recovered, for tax purposes, over a specified time period through annual deductions.
  • Qualifying solar energy equipment is eligible for a cost recovery period of five years.
  • The market certainty provided by MACRS has been found to be a significant driver of private investment for the solar industry and other energy industries.

The U.S. tax code allows for a tax deduction for the recovery of the cost of tangible property over the useful life of the property. The Modified Accelerated Cost Recovery System (MACRS) is the current depreciation method for most property. The market certainty provided by MACRS allows businesses in a variety of economic sectors to continue making long-term investments and has been found to be a significant driver of private investment for the solar industry and other energy industries.

MACRS as a Method of Depreciation

The Modified Accelerated Cost Recovery System (MACRS), established in 1986, is a method of depreciation in which a business’ investments in certain tangible property are recovered, for tax purposes, over a specified time period through annual deductions. MACRS is the method of depreciation used for most property, though assets vary by class, which determines the depreciable life, or cost recovery period, of the property. Class depreciation timeframes vary between three and 50 years, depending on the certain type of property. Some examples of classes include television and radio broadcasting equipment, which qualify for a cost recovery period of five years and office furniture and equipment, which qualify for a cost recovery period of seven years. 

Qualifying solar energy equipment is eligible for a cost recovery period of five years. For equipment on which an Investment Tax Credit (ITC) or a 1603 Treasury Program grant is claimed, the owner must reduce the project’s depreciable basis by one-half the value of the ITC. This means the owner is able to deduct 85 percent of his or her tax basis. 

Various other renewable energy technologies also qualify for a five-year cost recovery period, including wind energy property, geothermal, fuel cells, and combined heat and power technology. Certain biomass property is eligible for a seven-year cost recovery under MACRS. Other energy technologies qualify for accelerated depreciation, including a 15-year recovery period for nuclear power plants and a seven-year recovery period for natural gas gathering lines.

Accelerated Depreciation Encourages Private Sector Investment

MACRS depreciation is an important tool for businesses to recover certain capital costs over the property’s lifetime. Allowing businesses to deduct the depreciable basis over five years reduces tax liability and accelerates the rate of return on a solar investment. This has been a significant driver for the solar industry and other energy industries. 

Accelerated depreciation, along with other successful energy tax incentives such as the Investment Tax Credit (ITC), has helped fuel unprecedented growth in annual solar installations. The U.S. solar market is projected to install 5,300 megawatts (MW) of photovoltaic (PV) generating capacity in 2013, compared to 105 MW installed in 2006. As of Q2 2013, there are now more than 9,400 MW of cumulative installed solar electric capacity, enough to power 1.5 million homes.

Bonus Depreciation

In response to the severe economic crisis of 2008, Congress decided to further incentivize capital investment by accelerating the depreciation schedule economy-wide. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 allowed companies to claim a 100% depreciation bonus on qualifying capital equipment purchased and placed in service by December 31, 2011. Under current law, companies that place qualifying equipment in service through December 31, 2012 are eligible for 50 percent bonus depreciation. This means that in the first year of service, companies can elect to depreciate 50 percent of the basis while the remaining 50 percent is depreciated under the normal MACRS schedule. For more information, the IRS released official guidance (Rev. Proc. 2011-26) concerning bonus depreciation.

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