Unlock 60% Faster Solar Depreciation via IRA Rules
The Inflation Reduction Act introduced one of the most transformative financial mechanisms ever applied to renewable energy assets in the United States: accelerated depreciation for solar investments. Under these updated rules, commercial solar owners can recover up to 60 percent of a system’s cost basis through depreciation deductions far faster than under prior schedules. This shift has reshaped the economics of solar deployment, influencing developer returns, investor appetite, and project timelines across every major solar market.
How Accelerated Depreciation Works
Depreciation allows businesses to recover the cost of equipment and other capital assets through annual tax deductions. For solar projects, this mechanism historically operated under the Modified Accelerated Cost Recovery System, or MACRS, which spread deductions over a five-year schedule. The Inflation Reduction Act updated this landscape by introducing bonus depreciation opportunities that can be layered with the Investment Tax Credit, or ITC, giving project owners the ability to capture a majority of their depreciation benefits almost immediately.
Under the revised framework, qualifying solar systems can use a 60 percent bonus depreciation rate in the first year of operation. The remaining 40 percent is then depreciated under the standard MACRS schedule. This effective acceleration means that owners can claim a substantial portion of their capital outlay in the same tax year the system begins generating power.
The Financial Advantage for Solar Businesses
For developers and commercial owners, this faster depreciation schedule directly improves project returns by reducing taxable income in the early years of operation. The financial impact is especially significant for large-scale systems where equipment and installation costs can exceed several million dollars. By capturing more value upfront, project sponsors improve internal rates of return and shorten payback periods.
“Accelerated depreciation is one of the most underappreciated tools available to solar investors,” said Mark Ellison, Chief Financial Officer at SunReach Energy, a Virginia-based solar developer. “The IRA’s 60 percent allowance changes cash flow models entirely, particularly for projects financed through tax equity partnerships.”
The benefit is not limited to developers alone. Corporate buyers investing in on-site solar under direct ownership structures can also leverage the faster write-off to improve their balance sheets. For manufacturers and logistics operators with high taxable income, this can translate into meaningful reductions in annual tax liabilities.
Combining Depreciation With the Investment Tax Credit
The most powerful financial outcomes occur when accelerated depreciation is combined with the Investment Tax Credit. Under current tax rules, the ITC allows system owners to deduct a percentage of their eligible project cost from federal taxes. When layered with 60 percent first-year depreciation, the combined effect can offset a large portion of the system’s total cost in the first year.
For example, consider a 5 MW commercial solar system with a total installed cost of $6 million. This system might qualify for both a 30 percent ITC and the 60 percent depreciation benefit. After applying the ITC, the depreciable basis is reduced, but the remaining amount still delivers a substantial deduction. The combined tax savings can exceed $3 million, effectively cutting the net cost of the system in half before accounting for energy savings or renewable energy credits.
“Understanding how these incentives interact is critical,” said Carla Nguyen, Director of Project Finance at ClearGrid Advisors, a California-based consultancy specializing in renewable energy finance. “The sequencing of tax benefits, particularly how the ITC adjusts the depreciable basis, can determine whether a project achieves its targeted return.”
Eligibility and Compliance Requirements
Not every project automatically qualifies for the 60 percent accelerated depreciation rate. To access the full benefit, the system must meet specific domestic content, wage, and apprenticeship requirements outlined in the Inflation Reduction Act. Systems failing to meet those conditions may still qualify for standard MACRS depreciation, but without the bonus percentage.
Developers must also ensure that ownership structures align with Internal Revenue Service guidelines. Tax equity partnerships, which are common in utility-scale and commercial projects, require careful allocation of depreciation benefits between partners. Documentation must clearly demonstrate ownership interests and the timing of placed-in-service events.
“Proper structuring is everything,” said David Morales, partner at Greenfield Tax Strategies in Denver. “If ownership transfers or operational milestones are documented incorrectly, the IRS can disallow accelerated depreciation, which can upend a project’s financial assumptions.”
Implications for Project Financing
The availability of 60 percent first-year depreciation has reshaped how lenders and investors view solar projects. For tax equity investors, accelerated depreciation provides an additional layer of predictability in tax benefit timing. For lenders, it strengthens borrower cash flows in the early years, improving debt service coverage ratios.
Financial models now integrate both the ITC and accelerated depreciation as critical inputs when determining equity yields and loan sizing. Developers are increasingly using depreciation benefits to reduce required investor returns, making projects more competitive in power purchase agreement bids.
“Lenders are factoring in the faster depreciation as part of their underwriting,” said Lisa Gomez, Managing Director of Renewable Energy Finance at Horizon Bank. “It reduces risk on the equity side and can help shorten the debt tenor, which is attractive for both borrowers and investors.”
Regional Effects Across the U.S.
The impact of these rules has varied across regions depending on project scale and tax appetite. In states such as Texas, Arizona, and Florida, where utility-scale solar continues to expand, developers are using accelerated depreciation to offset the high cost of grid interconnection and land development. In the Northeast and Midwest, commercial and industrial customers are leveraging the same provision to justify on-site solar installations that would otherwise produce modest financial returns.
The ability to depreciate 60 percent of system costs upfront has also influenced equipment procurement strategies. Developers are increasingly sourcing from domestic manufacturers to ensure compliance with IRA content rules, aligning financial incentives with domestic supply chain goals. This trend is visible in mounting system orders, inverter supply contracts, and tracker manufacturing expansions across several U.S. states.
Strategic Considerations for Developers and Investors
Accelerated depreciation can be a powerful tool, but it also introduces complexity. Project sponsors must evaluate whether their own tax capacity allows full utilization of the deduction. For entities with limited tax liability, partnering with tax equity investors or forming leasing structures can help monetize the depreciation benefit more effectively.
Developers should also coordinate closely with financial advisors to model depreciation timing alongside revenue recognition. For projects financed through power purchase agreements, the tax benefits may offset lower long-term margins, improving near-term profitability without altering contract pricing. In contrast, owner-operated systems may prefer a balanced depreciation schedule to maintain consistent tax benefits over time.
Tax advisors recommend maintaining detailed cost segregation studies to substantiate the depreciable basis. Such studies separate eligible components, including racking, electrical equipment, and site work, allowing for more precise and defensible tax filings.
Market Outlook and Long-Term Impact
The 60 percent depreciation allowance is expected to remain a major driver of solar adoption throughout the next several years. Analysts from Wood Mackenzie project that accelerated depreciation could influence more than 30 percent of new commercial and industrial solar installations nationwide. The provision enhances after-tax returns, making solar one of the most financially efficient capital investments available to businesses.
The rule also reinforces the broader policy objectives of the Inflation Reduction Act by linking financial incentives to domestic manufacturing and labor standards. As more companies qualify under those provisions, the accelerated depreciation benefit will continue to strengthen the business case for U.S.-made solar components.
“Policy certainty around depreciation has given developers confidence to commit to larger portfolios,” said Nguyen of ClearGrid Advisors. “It stabilizes project economics and allows investors to focus on execution rather than regulatory risk.”
Steps to Maximize Your Depreciation Benefits
To apply these rules effectively, start by assessing your project’s eligibility for domestic content and labor standards. Engage a tax advisor early to conduct a cost segregation study and model the interaction between ITC and depreciation. Document all ownership and operational milestones meticulously to support your IRS filings.
Consider tax equity partnerships if your tax appetite is limited, and integrate these benefits into your financing models to optimize returns. By aligning your strategy with IRA requirements, you can accelerate cost recovery and position your solar investment for sustained profitability.