Depreciation: The reduction in the value of an asset associated with an investment project with the passage of time, due in particular to wear and tear. Depreciation is only relevant for off-takers who chose to purchase an installation, either by cash or via a loan.
Solar installations are a long term asset and businesses depreciate long-term assets for tax and accounting purposes. There are three options for depreciation: no depreciation, straight line depreciation, and modified accelerated cost recovery system (MACRS):
- No Depreciation - Select no depreciation if you do not want to write off any of the price of the asset as soon as the off-taker purchases the system. This would result in large losses in the year of purchase followed by unusually high profitability in the following years as revenue is recognized from the investment with no offsetting expense.
- Straight Line Depreciation - Choose 5, 15 or 20 year straight line depreciation to gradually recognize the expense of the system evenly over the duration selected.
- MACRS - Choose 5, 7, 15 or 20 year MACRS to front load your depreciation. A 5-year depreciation is common in solar allowing businesses to reduce tax liability and accelerate the rate of return in the solar investment.
Bonus depreciation was enacted by Congress in 2008 to allow companies to depreciate 50% of the asset in the first year and then continue to depreciate under normal MACRS. Some states, such as California, do not allow bonus depreciation to be applied at the state level.
We suggest that you consult your financing partner to advise you on what method to use as your depreciation.