IRS Updates Solar Depreciation Rules for 2026 Implementation
The Internal Revenue Service has released guidance that changes depreciation calculations for solar energy systems from 2026 onward. This update affects solar developers, asset owners, and tax equity investors by modifying classifications under the Modified Accelerated Cost Recovery System, known as MACRS, and adjusting bonus depreciation eligibility. Experts indicate these revisions may influence financial projections for commercial and utility-scale solar projects throughout the United States.
Currently, most solar generation assets fall under a five-year MACRS recovery period, enabling substantial deductions in initial operating years. The new rules narrow eligible equipment definitions, moving some balance-of-system components to longer recovery periods. Although the Investment Tax Credit remains unchanged, the adjustments alter the pace of capital recovery via depreciation, which plays a vital role in project financing.
Primary Changes to Depreciation Categories
The IRS now separates electrical distribution property, structural mounting systems, and energy conversion equipment. Key updates include the following classifications:
- Photovoltaic modules, inverters, and direct current cabling stay in the five-year MACRS category.
- Tracker motors, structural steel, and fixed-tilt racking foundations shift to seven-year property when permanently affixed to land or embedded in concrete footings.
- Energy storage systems integrated with solar arrays keep five-year status only if solar energy charges them at least 50 percent of the time, supported by operational records.
Tax professionals note that the IRS aims to match depreciation periods with each component's physical durability and expected lifespan. Karen Mitchell, a partner in the renewable energy tax practice at Boston-based Harlow & Reed LLP, explains, "The IRS signals that not every part of a solar installation qualifies as short-lived equipment. Developers must conduct detailed asset classifications in cost segregation studies."
Impacts on Project Financials
Solar industry financial teams are updating models to evaluate these rule changes. For a 100 MW utility-scale solar plant with capital costs over $100 million, reclassifying 25 percent of expenses from five-year to seven-year recovery reduces early tax shields significantly.
SolTax Advisors' analysis shows a potential 6 to 8 percent drop in after-tax internal rate of return for projects using standard tax equity partnerships. David Lewis, principal at SolTax, states, "The rules move value from early years to later ones. Sponsors depending on accelerated depreciation to draw tax equity may encounter narrower margins."
Investors often prioritize rapid capital recovery, and extended schedules could deter funds with brief investment timelines. Developers might counter this by boosting sponsor equity or adjusting preferred return terms in agreements.
Integration with Bonus Depreciation Phase-Out
The guidance also addresses interactions between the new MACRS categories and the bonus depreciation phase-down. Previously, qualifying property allowed 100 percent first-year depreciation, tapering over time until full phase-out.
Components reassigned to seven-year status lose eligibility for complete first-year expensing in remaining bonus years. This prompts shifts in procurement and equipment choices. Laura Jenkins, chief financial officer at Arizona-based EPC firm SolMount Energy, observes, "Developers will scrutinize modularity and mobility. A disassemblable tracker system might retain five-year status, though it raises engineering and documentation hurdles."
Enhanced Documentation and Compliance Needs
The IRS stresses comprehensive engineering records for cost allocations. Owners must document each component's role in electricity generation and its attachment to land. Tax advisors urge early collaboration with independent engineers and cost segregation experts for robust classifications.
Alan Ruiz, managing director of tax services at RenewCap Analytics, advises, "Future projects require component-level breakdowns. The IRS demands proof that a tracker drive or foundation pile has a unique useful life apart from solar modules. Absent such evidence, audits may trigger reclassifications and penalties."
For energy storage, co-located battery systems need operational data showing at least half of annual charges from solar sources to secure five-year eligibility. Owners must log this data via monitoring systems and retain records throughout the depreciation term.
Responses from the Solar Sector
Industry associations and developers worry the changes may slow investment growth amid emerging domestic manufacturing supports. The Solar Energy Industries Association, or SEIA, is analyzing the guidance and plans IRS discussions on unclear areas.
SEIA senior director of tax policy Brian Connelly comments, "Depreciation schedules form the foundation of project finance. Delays in cost recovery can challenge project viability, particularly in competitive power purchase agreement environments."
Manufacturers see potential for product innovation. Suppliers of mounting systems with removable or modular designs can promote five-year MACRS retention. Maria Lopez, vice president of engineering at California-based SolFrame Technologies, notes, "This presents a design opportunity. Documenting non-permanent affixation allows customers to keep faster depreciation, enhancing our offerings."
Wider Market Effects
These depreciation adjustments coincide with federal incentives and domestic content mandates in the U.S. solar market. The Investment Tax Credit drives economics, but accelerated depreciation has complemented tax equity arrangements. Slower schedules may recalibrate return profiles, especially for utility-scale projects in low-margin wholesale markets.
Wood Mackenzie analysts forecast a 2 to 3 percent rise in levelized cost of energy for new solar facilities, varying by financing and state tax alignment. States adopting federal schedules face consistent impacts, while decoupling states might retain prior treatments for local taxes.
Merchant or hybrid projects, reliant on market prices over fixed contracts, face heightened risks due to diminished upfront tax advantages.
Engineering Focus on Mounts and Foundations
Reclassifications for racking and foundations concern engineering, procurement, and construction firms. Helical piles, driven posts, and ballast systems require assessments of permanence. Removable systems without land damage may qualify for shorter periods.
Jeff Patterson, a structural engineer at MountTech Consulting in Colorado, points out, "Permanence versus removability lacks clear lines. A helical pile can be extracted, but grouting or concrete embedding may deem it permanent under IRS views. Developers should select installation methods aligned with tax goals."
EPC contracts will likely include risk-sharing provisions. If owners claim five-year status and face IRS reclassification, tax liabilities could mount. Standard exhibits will detail installation and cost breakdowns.
Perspectives from Investors and Lenders
Tax equity investors assess yield impacts from the new rules. Flip partnership models combine the Investment Tax Credit with accelerated depreciation for returns in five to seven years. Extended depreciation prolongs flip timelines, reshaping exit plans.
Lenders examine effects on debt service coverage via after-tax cash flows. Diminished early deductions may trim projected ratios slightly. Project value holds, but timing alters profiles.
Michael Grant, managing director of project finance at GreenBank Capital, says, "Lenders require updated pro formas under the new rules. Financing continues, but covenants and reserves may tighten."
Preparation Steps for Developers
Tax advisors outline essential actions for compliance:
- Perform asset-level cost segregation studies in design and procurement phases to assign precise tax lives.
- Gather engineering documentation differentiating removable and permanent elements.
- Install monitoring for solar charging verification in co-located batteries.
- Examine tax equity agreements for MACRS and bonus depreciation references.
- Consult legal experts on state tax conformity risks and benefits.
For multi-phase projects, developers can commission phases pre-2026 to lock in existing treatments. Redesigns emphasizing modularity may support shorter recoveries.
Adapting to Changes and Future Prospects
The IRS update adds short-term tax accounting complexity, but it may foster uniform asset classifications industry-wide. Standardized types could minimize audit conflicts and clarify investor benchmarks.
As solar adopts durable materials and storage integration, longer periods align with actual performance. Racking often lasts over 20 years, and modular inverters extend lifespans.
Implementing Effective Tax Strategies
Developers should integrate these rules into planning now. Collaborate with tax and engineering teams to classify assets accurately and document installations. Explore modular designs to maximize five-year benefits where possible. These steps preserve project economics and ensure compliance amid evolving incentives.