IRS Rule Changes Solar Depreciation Starting in 2026
A new Internal Revenue Service rule set to take effect in 2026 will alter the depreciation landscape for commercial solar assets. This adjustment targets the Modified Accelerated Cost Recovery System, or MACRS, and directly affects how developers and investors calculate project returns. As a result, valuations, financing options, and overall cash flows in the U.S. solar sector stand to shift significantly.
The rule introduces a narrower definition of the depreciable basis, particularly in relation to the Investment Tax Credit and bonus depreciation. Previously, developers claimed deductions on approximately 85 percent of project costs after the ITC. Now, exclusions for certain indirect costs and financing elements will reduce this amount, leading to lower tax shields in the early years of a project's life.
Understanding the Revised Depreciable Basis
The core of the change lies in how the IRS interprets eligible costs for depreciation. Solar energy property must now exclude specific indirect expenses, such as certain development fees and interest allocations tied to financing. This revision ensures that only direct costs associated with the physical assets qualify, aligning depreciation more closely with tangible investments.
For instance, in a typical 5 MW commercial solar installation, developers might see the depreciable base shrink by 10 to 15 percent. This adjustment stems from a closer examination of ITC interactions, where the credit reduces the basis but now limits what remains eligible for accelerated recovery. Tax experts emphasize that this move aims to prevent over-depreciation of non-physical elements.
"This reinterpretation demands a fresh look at cost categorization," notes Laura Nguyen, tax director at SunEdge Renewables in California. "Developers who previously bundled indirect costs into the basis will need to segment their budgets more precisely to maintain accurate projections."
Key Financial Impacts on Developers and Investors
Solar projects, from rooftop systems serving businesses to large utility-scale arrays, have long depended on MACRS to accelerate cost recovery and boost after-tax returns. With a reduced depreciable base, the timeline for deductions lengthens, potentially lowering internal rates of return by several percentage points.
Analysts at Clean Energy Research Partners project a 8 to 12 percent drop in overall depreciation benefits for projects claiming the full ITC. This hit proves most pronounced in tax equity deals, where investors rely on depreciation pass-throughs for up to 70 percent of their yields. Sponsors may respond by raising pre-tax hurdles, which could elevate energy prices or squeeze developer margins.
Consider a 50 MW utility project: Under current rules, first-year depreciation might cover 20 percent of costs. Post-2026, that figure could fall to 16 percent or less, delaying cash flow positives by one to two years. Developers should model these scenarios using updated software tools to forecast equity flips and partnership distributions accurately.
"Depreciation forms the backbone of tax equity attractiveness," explains Marcus Hall, managing partner at GreenCap Advisors. "A diminished base means investors demand higher allocations or additional guarantees, prompting developers to negotiate harder on flip points and hurdle rates."
To mitigate effects, some firms explore hybrid financing, blending tax equity with debt instruments that offer fixed returns less sensitive to depreciation shifts.
Effects on Procurement, Installation, and Supply Chains
The rule ripples through the supply chain, influencing decisions on equipment and construction. With depreciation benefits curtailed, developers prioritize cost efficiencies, such as opting for inverters and panels that qualify for domestic content bonuses under the Inflation Reduction Act. These add-ons can offset ITC reductions by providing extra credits of up to 10 percent.
EPC contractors face pressure to trim expenses in labor-intensive regions like the Midwest, where ground-mount systems require extensive steel racking and trenching. Modular panel designs and pre-fabricated mounting systems emerge as solutions, cutting on-site assembly time by 20 to 30 percent and reducing material needs.
Suppliers of balance-of-system components, including trackers and cabling, may see demand fluctuate as developers scrutinize total installed costs. Firms that certify products for multiple incentives position themselves favorably, helping clients maximize remaining tax advantages.
In practice, a commercial rooftop project might shift from premium imported modules to U.S.-made alternatives, even if initial costs rise slightly. The long-term savings from preserved credits and streamlined permitting outweigh upfront premiums.
Navigating Transitional Rules and Industry Responses
As the rule approaches, calls for transitional guidance grow louder. The Solar Energy Industries Association advocates for safe harbors that protect projects starting construction before 2026, including those in advanced permitting or with binding procurement contracts.
Key questions center on defining "indirect costs" and confirming bonus depreciation eligibility during phase-ins. Tax professionals recommend documenting all expenditures meticulously, using IRS-compliant ledgers to substantiate claims. Without clear directives, projects risk audits or disallowed deductions, eroding investor trust.
"Mid-stream rule changes create hesitation in the pipeline," says Nguyen. "Developers benefit from phased implementation, allowing time to adjust models without halting momentum in high-growth markets."
Industry stakeholders monitor IRS notices closely, preparing advocacy for extensions on existing MACRS elections. Early adopters of compliant practices, such as segregated cost accounting, gain a competitive edge in securing financing.
Steps to Adapt and Thrive in the Evolving Landscape
To prepare, commercial solar owners and developers should audit current financial models against the anticipated changes. Engage tax advisors to recalibrate depreciation schedules and stress-test cash flows under conservative assumptions. This exercise reveals vulnerabilities in equity structures and highlights opportunities for incentive stacking.
Lenders will likely adjust underwriting, favoring projects with diversified revenue streams like long-term PPAs or community solar subscriptions. Developers can counterbalance depreciation losses by pursuing grants or state rebates that target installation phases.
Ultimately, proactive adaptation turns challenge into opportunity. By refining procurement to emphasize resilient, incentive-aligned components and diversifying funding sources, firms sustain robust returns. Those who integrate these shifts into strategic planning emerge stronger, driving continued expansion in the solar market despite evolving tax dynamics.