Solar panels and home office

[sswariaootghg]

My wife and I installed solar panels on my home in July 2020 at a cost of $34,362. We took a 20-year loan to pay for them, and we received a $8,934 federal residential energy credit and a $5,000 New York solar energy system equipment credit. (We applied these credits to our loan principle in early 2022 to lower our payments.) Now we pay $124.02 per month on this loan.

My wife began a business on Jan. 1, 2022 that uses a portion (7.89%) of our home as her office. Turbo Tax says I can deduct 7.89% of mortgage interest and real estate taxes (since we aren't itemizing) and utilities as business expenses. What about the payments we are making for the solar panels? I've seen elsewhere that they are an asset, not an expense, and can be depreciated, but does that apply to assets purchased prior to the business being started? I've also seen that the interest can be prorated as an expense. (We paid $762.73 in interest last year.)

How do I handle this? Can someone help me?

[ThomasM125]

You can add the cost of the panels, less the energy credit associated with them, as an asset for depreciation purposes, prorated for the portion that belongs to the home office. You could deduct the portion of the interest that applies to the home office as a home office expense, but it wouldn't technically be mortgage interest unless the loan documents reflected that the obligation was secured by you home.

[sswariaootghg]

Thank you for your reply. It doesn't matter that the solar panels were installed a year and a half prior to the business started up? (The asset was acquired before the business started, but most of the payment for it is after startup.)

I think the loan documents for the solar panels placed a lien on the house, so I assume that means it is secured by the home.

[AnnetteB6 · Accepted solution]

In my mind it makes more sense to add the cost of the solar panels minus the credits you received to the cost basis of your home itself.  The solar panels would be considered an improvement to your home and they are now a component of the home, so instead of depreciating them separately, include them with the depreciation of your home for the purpose of the home office.  That way, it is not an issue that they were placed in service prior to your business starting.  The whole home, including the solar panels, will then be placed in service for business purpose at the same time when you began using the home office.

Whether or not the loan on the solar panels placed a lien on your property or didn't, you can deduct the interest portion as an expense related to your whole home.  Then the proportional home office percentage can be calculated for that expense.  If the loan is considered to be a mortgage, then you should probably receive a Form 1098 reporting the interest amount to you.

@sswariaootghg 

[sswariaootghg]

Thank you for your answer. I suppose it makes sense, but I don't understand how I could claim depreciation on an asset like a home that is appreciating year-over-year.