Can we use MACRS for 5-year depreciation for year 2017 tax, in additional to Form 5695, on the solar panel installed on residential house Dec 2016 ?

[Annie2]

We installed the solar system Dec 2016 and filed the Form 5695 for the Federal credit in Year 2016 tax return.  Recently, we received a phone call from a solar energy association who suggest us that we can use MACRS for 5-year depreciation on the solar panel to reduce our tax liability in next 5 years.  Although it’s a residential house that installed solar system but any excess electricity generated from solar sell to local electric company.  This is a business behavior.  Is it a true statement?  If so, how to get help from Turbo tax ?

[Critter · Accepted solution]

You can't depreciate anything on your personal residence.

https://www.thetaxadviser.com/newsletters/2017/oct/credit-residential-solar-panels.html

However if you can depreciate the business asset ...  

https://www.seia.org/initiatives/depreciation-solar-energy-property-macrs

[Charlie12345]

I don't want to step on toes here but yes you can depreciate a residential solar array. It falls under MACRS that businesses use but it's for a personal residence. You will have to go through a CPA that is licensed for it, but the 87% depreciation can be taken on a residence. So take the cost of your system $100,000 times .87 and you will get the depreciation value. In this case $87,000, then find what percentage tax bracket you are in 26% is common and multiply it out. $87,000 X's .26 = $22,620 in taxes not paid. Might want to amend your taxes. 

[Akindall]

Do you have a CPA that will work with this. I've talked with 3 and have got no help!

Thank you. Alan K. [email address removed]  [phone number removed]

[AmeliesUncle]

Depending on the circumstances, claiming it as a business can be a fairly aggressive position, which is why many tax professionals won't do it.  But in my opinion, it can be done, especially in certain circumstances.

However, the TOTAL amount of electricity produced is counted as business income, not just the 'net'.   And at whatever point the business starts becoming profitable, the electricity produced will be subject to both income tax and self employment tax.

[Mike9241]

first it must be a trade or business. there is no definition in the Internal Revenue Code. Rather it's based on numerous court rulings decided using the facts and circumstances in each case

from the IRS

Trade or Business

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. Some of the important facts and circumstances used to make this determination include:

1. regularity of the activities,
2. regularity of the transactions,
3. production of income, and
4. ongoing efforts to further the interests of your business.

if this activity produces a loss in 3 out of any 5 consecutive years the IRS can invoke the hobby loss rules under IRC 183. Then the loss will be denied and you'll end up with a bill for the taxes, penalties which could be substantial and interest.

you should consult with in independent tax pro probably with a large firm because they may have more expertise in this area. If you call that's a question you should ask - their expertise in this area.

[AmeliesUncle]

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@Mike9241 wrote:

if this activity produces a loss in 3 out of any 5 consecutive years the IRS can invoke the hobby loss rules under IRC 183. Then the loss will be denied

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That statement is a bit misleading.  A loss in 3 out of 5 years does not mean it is a hobby and the loss will be denied.  It merely means it isn't automatically assumed to be a for-profit activity.

[Mike9241]

@AmeliesUncle I did use the word "can" which would imply it's up to the iRS. This is why i suggested consulting with a tax pro who could do further research in the matter. 

[Anonymous_]

Re "3 out of 5", it was actually stated in the reverse, @Mike9241 

Per Section 183, unless the Secretary establishes to the contrary, where gross income exceeds deductions for 3 out of 5 consecutive years, then the activity is presumed to be engaged in for profit. There is no presumption for the converse, though.

[Mike9241]

that's why i used "can". In practice I had two clients where can became a reality.   

[Anonymous_]

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@Mike9241 wrote:

that's why i used "can". In practice I had two clients where can became a reality.   

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I understand now. My only point was that losses for 3 out the last 5 consecutive years do not raise a presumption that the activity is not engaged in for profit (of course, the IRS is free to challenge the profit motive, regardless).