How to Combine Energy Investment Credits and Bonus Depreciation for More Freelance Tax Savings
If you are looking to add solar panels to your home, freelance business office, or a rental property that you own, the good news is that you can offset the cost using the federal Energy Investment Credit which we discussed in detail in our previous post. To claim the Energy Investment Credit for solar panels and other qualifying projects, you can use Form 3468 Investment Credit.
As a result of the Inflation Reduction Act in 2022, the ITC was set at 30% and extended for at least the next decade, so you may wish to consider qualifying projects related to your business in tax years 2023 and 2024. Starting in 2025, there are more criteria you must fulfill before you can get the full 30% tax credit.
After 2025, the continuation of the ITC for commercial projects such as solar panel systems and other energy-efficiency initiatives will depend on whether the solar and electric sectors meet the U.S Department of Treasury’s goals of reaching a 75 percent reduction in emissions below 2022 levels.
However, your tax savings don’t need to stop at these tax credits on business and rental properties (although your primary residence solar panel project does not qualify): you can also claim 100% bonus depreciation on all solar panel installations and other qualifying projects.
Here is what is covered under the 100% bonus depreciation allowance for solar panels:
- Solar PV panels
- Balance-of-system equipment
- Circuit breakers
- Step-up transformers
- Surge arrestors
- Batteries and other energy storage devices
- Sales tax
- Installation costs and other indirect costs (as long as you can prove them).
Keep in mind that different states have different tax incentives for solar panels. However, some states (such as California) offer considerably better incentives than others. You do need to subtract the amount of the tax credit you received from the cost when you claim the solar panels as an asset for bonus depreciation.
Calculating bonus depreciation on all solar panel installations and other qualifying projects
Here’s a simple example of how to calculate bonus depreciation on all solar panels, with the assumption that you installed a solar energy system that costs $100,000 in direct and indirect expenses.
You must first claim and deduct the 30% solar tax credit (check the amount here based on the year that you are claiming).
The IRS reduces the basis of this tax credit by half, so you are left with (30% ÷ 2) 15%. Consequently, you can depreciate the $100,000 cost by 15%, bringing it down to $85,000.
You can then claim the 100% bonus on the first year of the solar system’s installation.
If your state, as an example, offers a 5% tax credit. You can apply this to the base cost of $85,000 and multiply it with the federal and state governments’ rates to determine how much you stand to save, as shown below:
Based on these calculations your savings with the tax credit are as follows:
- Federal tax credit: $85,000 X 30% = $25,500.
- State tax credit: $85,000 X 5% = $4,250.
You can claim the whole federal tax incentive in your first year. However, you can only claim the state credit over several years, depending on the amount in question.
Additional freelance tax benefits of applying the 100% bonus depreciation for solar systems?
Since you can now depreciate the entire expense of the solar system in year one instead of spreading it out over several years that means the payback period of the asset is reduced and you reduce your taxes in one tax year which can be helpful to reduce your tax obligations overall.
Keep in mind that to qualify for the energy investment tax credit itself, you must have commenced construction of a solar photovoltaic system on or before December 31, 2019 and at least 5% of the qualifying project costs must be incurred before you can claim any credit or bonus depreciation.
If you need assistance calculating the Energy Investment Credit for your freelance business or you have questions on if you can claim bonus depreciation on your freelance taxes, be sure to check with a tax professional.