What is the Modified Accelerated Cost Recovery System (MACRS)?

by | Feb 24, 2020 | Commercial, Financial

Established in 1986, the Modified Accelerated Cost Recovery System (MACRS) is a depreciation system in use in the United States that allows businesses to recover part of the capitalized cost of an asset for tax purposes through annual deductions. Typically these assets are bundled in different classes, each with their own set depreciation period. By allowing for accelerated depreciation on certain property, the Internal Revenue Service (IRS) is enabling businesses and individuals to recoup greater amounts early on in an asset’s life and effectively providing a maintenance allowance to cover any obsolescence or wear and tear on the property.

Currently, several renewable energy systems—including a variety of solar electric and solar thermal technologies, small wind, combined heat and power (CHP), and select geothermal systems—are eligible for MACRS depreciation schedules of five to seven years under the federal tax code. Qualifying solar PV equipment is eligible for a 5-year cost recovery period, allowing businesses to accelerate their return on their solar investment significantly.

Using Accelerated Depreciation for Solar Projects

MACRS is an important tool for businesses with depreciable assets of any kind (phones, vehicles, solar, etc.) as it provides market certainty, which drives continued economic investment. Paired with other generous incentives such as the 26% federal Investment Tax Credit (ITC) for qualifying solar systems, accelerated depreciation has helped keep installation costs low and has been particularly effective in growing the adoption of solar-electric systems throughout the United States.

Over the 5-year depreciation schedule, a business may be able to recoup anywhere from 10-25% of the solar system’s original cost using MACRS depending on a business’s tax rate. If a project is able to claim the 26% ITC and receives a credit against the business’s tax liability, the project owner will be able to deduct 87% (100% – [26% x 0.5]) of the total system cost via accelerated depreciation. The 5-year MACRS schedule is as follows:

Recovery Year Depreciation %
Year 1 20%
Year 2 32%
Year 3 19.2%
Year 4 11.52%
Year 5 11.52%
Year 6 5.76%

 

Established in 1986, the Modified Accelerated Cost Recovery System (MACRS) is a depreciation system in use in the United States that allows businesses to recover part of the capitalized cost of an asset for tax purposes through annual deductions. Typically these assets are bundled in different classes, each with their own set depreciation period. By allowing for accelerated depreciation on certain property, the Internal Revenue Service (IRS) is enabling businesses and individuals to recoup greater amounts early on in an asset’s life and effectively providing a maintenance allowance to cover any obsolescence or wear and tear on the property.

Currently, several renewable energy systems—including a variety of solar electric and solar thermal technologies, small wind, combined heat and power (CHP), and select geothermal systems—are eligible for MACRS depreciation schedules of five to seven years under the federal tax code. Qualifying solar PV equipment is eligible for a 5-year cost recovery period, allowing businesses to accelerate their return on their solar investment significantly.

Using Accelerated Depreciation for Solar Projects

MACRS is an important tool for businesses with depreciable assets of any kind (phones, vehicles, solar, etc.) as it provides market certainty, which drives continued economic investment. Paired with other generous incentives such as the 26% federal Investment Tax Credit (ITC) for qualifying solar systems, accelerated depreciation has helped keep installation costs low has been particularly effective in growing the adoption of solar-electric systems throughout the United States.

Over the 5-year depreciation schedule, a business may be able to recoup anywhere from 10-25% of the solar system’s original cost using MACRS depending on a business’s tax rate. If a project is able to claim the 26% ITC and receives a credit against the business’s tax liability, the project owner will be able to deduct 87% (100% – [26% x 0.5]) of the total system cost via accelerated depreciation. The 5-year MACRS schedule is as follows:

Recovery Year Depreciation %
Year 1 20%
Year 2 32%
Year 3 19.2%
Year 4 11.52%
Year 5 11.52%
Year 6 5.76%

 

Example: Using MACRS on a Commercial Solar Project

Please note these numbers are presented in simple dollar format and do not take into consideration their Net Present Value (NPV) or the time value of money. For our calculations, we are assuming a 30% tax rate. Your business’s tax rate may vary. Total Project costs in this example are $200,000. Remember, by claiming the ITC, a project owner’s depreciation basis will be 87% of the total project costs or $174,000 in this case.

Depreciation

Basis

Recovery

Year

Depreciation

%

Recovered

Amount

$174,000 Year 1 20%  $34,800
Year 2 32% $55,680
Year 3 19.2% $33,408
Year 4 11.52% $20,044.80
Year 5 11.52% $20,044.80
Year 6 5.76% $10,022.40

 

Bonus Depreciation

For qualified systems placed into service after September 27, 2017, and before January 1, 2023, bonus depreciation up to 100% is available thanks to The Tax Cuts and Jobs Act of 2017. Systems and equipment acquired before September 28, 2017, and placed in service before January 1, 2018, are only eligible for 50% bonus depreciation.  

Additional Resources:

For more on the history of bonus depreciation, including past extensions and specific qualifications, check out the Database of State Incentives for Renewables & Efficiency (DSIRE) website.

For more information on MACRS, see IRS Form 4562 – Depreciation and Amortization or the Instructions for Form 4562 document.

The IRS Publication 946 is also a helpful resource if you are interested in a complete guide to depreciating assets with MACRS (including a full list of asset classes).

Disclaimer:

We’re solar plus storage experts, not tax professionals. Any information in this article is meant as a high-level overview of available financial incentives in the solar industry and should not be treated as financial or tax advice. Please consult with your tax or accounting professional on MACRS and questions relating to accelerated depreciation.

Read More from the IPS Blog

How to Fund Your Solar Project as a Nonprofit

Looking to take your nonprofit solar? Historically, options for nonprofits to get solar panels have been limited. Thankfully, specialized financing options have been developed recently which makes it easier than ever for nonprofits to go solar.

Your Guide to Going Solar in Montana

Amidst falling solar equipment prices, Montana’s recent net metering victory, and the soon-to-expire federal tax credit, there’s never been a better time to go solar in Montana. Learn how!

Auto Dealerships are Seeing the Savings with Solar Energy

Auto dealers often have high energy costs while boasting ample flat roof space that is ideal for solar arrays. Additionally, federal and local incentives remain high, meaning there has never been a better time for auto dealers to explore solar.

What is the Modified Accelerated Cost Recovery System (MACRS)?

Established in 1986, the Modified Accelerated Cost Recovery System (MACRS) is a depreciation system in use in the United States that allows businesses to recover part of the capitalized cost of an asset for tax purposes through annual deductions.

Solar Panels and Home Value

Curious how solar panels will affect your home’s value or curb appeal? Considering there are more solar-powered homes than ever before, this is a question that has been on a lot of homeowner’s minds lately.

A Close Call for Solar Net-Metering in Montana

On November 25th, 2019, the Montana Public Service Commission (PSC) voted a unanimous 5-0 to reject a crucial component of a rate change proposal brought forth by NorthWestern Energy, the largest utility in the state. Read more about this victory for the Montana Solar Industry.

Lithium-ion vs. AGM Batteries: Which is best for solar?

Consumers are beginning to justify the higher cost of lithium-ion over lead-acid for the added value it delivers in longevity and robustness for residential and commercial energy storage systems. But which is the best type of battery for solar?

What are Demand Charges and How Do They Work?

Demand charges can make up a significant portion of a commercial monthly electric bill. Learn how these charges work and how solar and energy storage can play a beneficial role.

Solar Panels and Snow: Everything You Need to Know

Everything you need to know about solar panels and snow. The winter season and accompanying snow will reduce the production of solar panels—there’s no denying that. While that isn’t surprising, there are still plenty of misconceptions around solar panel operation and snow.

The Power Of Incentives: Promoting the Home of the Future

Last month our General Manager and CFO Yolanda Duperret spoke at a Renewable Energy Summit panel in Boulder focused on ‘Moving Beyond Fracked Gas.’