IRS Depreciation Changes Reduce First-Year Solar Deductions by 60 Percent
The U.S. solar industry confronts a significant accounting adjustment with new IRS depreciation rules effective in 2026. These rules alter calculations for project value among solar developers, engineering, procurement, and construction firms, and investors. The modifications slow tax deductions for solar assets, which influences pricing models, financing arrangements, and long-term returns in utility-scale and distributed generation markets.
Analysts project that these revisions could diminish first-year depreciation deductions by as much as 60 percent for new projects, based on ownership structures and technology types. For an industry dependent on accelerated depreciation to secure funding, this represents a pivotal federal tax alteration since the Investment Tax Credit emerged.
Current Depreciation Framework
Existing IRS Modified Accelerated Cost Recovery System rules assign most solar energy systems to a five-year depreciation period. Combined with the Investment Tax Credit, this enables project owners to deduct a substantial share of system costs in the initial year. Investors often value these upfront tax advantages as highly as future energy production.
Depreciation schedules outline the period for deducting an asset's cost from taxable income. In solar applications, accelerated methods offset initial capital outlays and support attractive internal rates of return. Bonus depreciation provisions enhance this by permitting immediate expensing of a large portion of costs.
Key Changes Effective 2026
From 2026 onward, the IRS phases out remaining bonus depreciation options that currently permit up to 80 percent of qualifying solar investments to depreciate in the first year. Standard MACRS schedules then apply, distributing deductions across several years.
Treasury Department guidance aims to steady tax revenues and harmonize renewable energy depreciation with other asset categories. Although the policy covers all qualified energy property, solar firms face pronounced effects due to their emphasis on tax equity financing.
John Merritt, tax director at Denver-based EPC firm Solar Foundations Group, noted that the rules will transform deal structures. “Tax equity investors have been counting on accelerated depreciation to generate early returns,” Merritt said. “This adjustment will force developers to revisit their capital stacks and possibly renegotiate partnership flips or sponsor contributions.”
Financial Effects on Developers and Investors
Projects will encounter elevated taxable income during early operations, which curtails immediate cash flow gains. In a standard 100 MW utility-scale project, first-year tax benefits might decline by millions of dollars, varying by financing terms. Developers may pursue elevated power purchase agreement rates or additional incentives to preserve profitability.
Private equity and tax equity investors incorporate depreciation into valuations. These rules add variability for projections in the post-change tax landscape. Lenders could tighten underwriting standards, expecting delayed repayment from projects lacking accelerated deductions.
Wood Mackenzie data indicates tax equity has supported about 40 percent of recent U.S. solar installations. Disruptions or repricing in this market may affect the development pipeline broadly. “The economics of tax equity change dramatically when you stretch depreciation over a longer period,” said Laura Chen, managing partner at SolCap Advisors, a San Francisco-based renewable finance consultancy. “The timing of cash flows will now matter even more than the absolute return.”
Technical and Accounting Adaptations
The shift demands updates beyond financial models, including revisions to depreciation schedules in accounting systems and adherence to updated IRS asset codes. Firms with extensive portfolios must adapt enterprise resource planning software and refresh cost segregation analyses.
Cost segregation studies dissect projects into components for optimal depreciation, such as assigning shorter periods to inverters, racking, and electrical gear versus site work or transmission links. These studies retain value under new rules but deliver reduced early benefits.
“We will need to coordinate more closely between engineering and accounting teams,” said Andrea Ruiz, CFO of Phoenix-based installer SolMount Solutions. “The new depreciation profiles will change how we forecast returns and allocate maintenance reserves. Every project model built before the rule change will require recalibration.”
Variations Across Regions and Segments
Impacts differ by sector. Utility-scale developers, reliant on tax equity, anticipate the strongest effects. Commercial and industrial projects under direct ownership may face squeezed returns. Residential solar, typically funded via loans or leases, experiences minimal disturbance as homeowners seldom claim depreciation.
High-growth states like Texas, Arizona, and Florida might see brief pauses in project starts pending IRS clarification. Markets favoring third-party ownership, such as California and New York, will likely witness adjusted leasing prices.
BloombergNEF forecasts an 8 percent drop in solar investment volume during the first year of implementation, especially if tax equity shifts to sectors with quicker depreciation.
Policy Background and Stakeholder Responses
This IRS move aligns with federal initiatives to standardize depreciation following stimulus-driven accelerations in manufacturing and infrastructure. Solar proponents contend renewables merit ongoing preferences as a national focus, yet Treasury prioritizes equity across assets for fiscal sustainability.
Groups like the Solar Energy Industries Association have advocated for relief on in-progress projects. Abigail Ross Hopper, SEIA president and CEO, stated the group engages Treasury officials. “We recognize the government’s interest in consistent tax policy,” Hopper said. “But sudden changes can disrupt multi-year projects that were financed under assumptions of accelerated depreciation. We are asking for phased implementation or grandfathering provisions.”
The IRS has yet to specify if pre-2026 construction qualifies for bonus depreciation. Developers accelerate procurement and contracts to preempt restrictions.
Industry Mitigation Strategies
Firms explore countermeasures like sale-leaseback deals to retain some tax advantages. Others leverage state incentives or production credits to counter federal reductions. Sponsors may attract corporate buyers offering premiums for renewable supply.
EPC providers and suppliers adapt to constrained economics. Developers will demand cuts in balance-of-system expenses, spurring advances in mounting, trackers, and foundations. Streamlined installations can reclaim margins eroded by slower depreciation.
“Cost reduction will become even more critical,” said Samir Patel, vice president of engineering at Ohio-based racking manufacturer TerraMount. “We are seeing renewed interest in single-bolt connections, prefabricated foundations, and modular wiring that can cut installation time by double-digit percentages. Every saved dollar matters when tax benefits shrink.”
Implications for the Wider Market
These changes highlight evolving renewable finance dynamics. As incentives adjust, the sector emphasizes efficiency, permitting processes, and technology to fuel expansion. Projections suggest a shift toward direct ownership and institutional commitments, lessening complex tax equity reliance.
U.S. manufacturing may experience knock-on effects. Tighter margins could alter demand for domestic parts, contingent on Inflation Reduction Act bonuses interacting with depreciation caps. Developers must balance these for project success.
Adapting to Sustained Solar Growth
The solar industry has navigated numerous policy evolutions in two decades. This depreciation adjustment marks a juncture that reshapes value generation. Though upfront deduction losses pose hurdles, they foster an industry grounded in performance and enduring energy value, positioning solar for resilient advancement.