IRS 2026 Solar Depreciation: What Businesses Need to Know
Businesses investing in solar energy systems are preparing for changes in how the Internal Revenue Service handles depreciation deductions. The federal tax code continues to encourage clean energy investment, yet the rules around solar depreciation are evolving. Understanding these shifts is critical for companies planning new installations or updating existing systems. The structure of depreciation directly affects return on investment, cash flow, and project valuation.
This article explains what businesses should know about solar depreciation under the rules expected to apply in the upcoming period, including how to calculate deductions, integrate them with other incentives, and plan for compliance. It also outlines practical steps to ensure that tax benefits are accurately captured and properly reported.
Understanding Solar Depreciation
Depreciation allows a business to recover the cost of tangible assets over time. For solar projects, this means the ability to deduct the system’s cost from taxable income across several years. The IRS treats solar energy equipment as a depreciable asset under the Modified Accelerated Cost Recovery System, or MACRS. This system permits faster cost recovery than traditional straight-line depreciation, which spreads deductions evenly over the equipment’s useful life.
Solar systems generally qualify for a five-year recovery period under MACRS. This classification covers photovoltaic panels, inverters, racking, and related components. Businesses can deduct a portion of the system’s cost each year to reflect declining value, which reduces taxable income and boosts cash flow.
The combination of MACRS depreciation and the federal Investment Tax Credit, or ITC, creates a strong incentive for renewable energy investment. When the ITC is claimed, businesses must reduce the depreciable basis of the solar asset by half of the credit amount. That adjustment affects how depreciation is calculated but still delivers significant financial benefits.
What Will Change Under the 2026 Rules
While the core MACRS structure remains, the available bonus depreciation percentage is set to decline. Bonus depreciation allows businesses to deduct a large share of an asset’s cost in the first year it is placed in service. Recent tax laws permitted full expensing, meaning a business could deduct the entire eligible cost immediately. Under the upcoming IRS schedule, that immediate deduction will gradually decrease, moving toward a lower percentage that must be spread over the standard five-year period.
For solar developers and commercial property owners, this change means the timing of project completion can affect the size of the first-year deduction. A system placed in service before the reduction takes effect can qualify for a larger initial deduction, while projects completed afterward will receive smaller upfront benefits but continue to depreciate through MACRS.
Any business planning a solar installation should account for these timing differences. The shift in bonus depreciation does not eliminate the benefit, but it changes how quickly the tax value is realized. Accurate forecasting and modeling are essential to avoid surprises in cash flow and tax planning.
Calculating Depreciation Under the New Schedule
To calculate depreciation, begin with the total cost of the solar system, including installation and associated equipment. Subtract half of the Investment Tax Credit claimed to determine the adjusted basis. Apply the appropriate bonus depreciation rate, then depreciate the remaining basis using the MACRS five-year schedule.
A simplified example helps illustrate the process. Suppose a company installs a solar system costing one million dollars and claims a thirty percent Investment Tax Credit. The depreciable basis is reduced by half of that credit, leaving an adjusted basis of eight hundred fifty thousand dollars. If the bonus depreciation rate is fifty percent, the company can deduct four hundred twenty-five thousand dollars in the first year. The remaining four hundred twenty-five thousand dollars is then depreciated over five years under MACRS.
This calculation method remains consistent, but the percentage applied to bonus depreciation will change under the 2026 framework. That adjustment affects how much of the cost is deductible in the first year and how much must be spread across subsequent years.
Interaction with the Investment Tax Credit
Depreciation and the Investment Tax Credit work together but must be applied in the correct sequence to avoid errors. Businesses first calculate the ITC based on the full eligible cost of the solar system. The credit directly reduces federal income tax liability, providing an immediate benefit. After the ITC is applied, the depreciable basis is adjusted, as mentioned earlier, to prevent double counting of the same expense.
The combination of these incentives can offset a large portion of the system’s initial cost. The ITC reduces tax liability directly, while depreciation lowers taxable income in future filings. For many commercial projects, these combined benefits can cover more than half of the upfront investment. Proper integration of the two incentives is critical for compliance and for maximizing the return on investment.
Qualifying Assets and Eligibility
The IRS defines qualifying solar property broadly, but not all components automatically qualify for accelerated depreciation. Eligible assets generally include photovoltaic modules, inverters, transformers, racking systems, and electrical wiring associated with power generation. Energy storage systems paired with solar arrays may also qualify if they meet certain ownership and operational tests.
To claim depreciation, the business must own the system or have a capital lease. Power purchase agreements, in which the developer retains ownership, typically allocate the depreciation benefit to the developer rather than the host customer. Understanding ownership structure is essential to determine who receives the tax benefit.
Property installed at commercial sites, manufacturing facilities, or agricultural operations can qualify under MACRS. Residential properties owned by individuals do not, though homeowners may still claim the ITC. Businesses must ensure that their installations meet the definition of qualifying energy property under IRS guidelines before claiming depreciation.
Recordkeeping and Compliance
Accurate documentation is essential for any tax deduction. The IRS requires businesses to maintain records that support the cost basis, installation date, and operational status of the solar system. These records include purchase invoices, contracts, and commissioning certificates.
Businesses must also document how the depreciable basis was calculated, including the adjustment for the Investment Tax Credit. Failure to maintain clear records can lead to disallowed deductions or penalties in the event of an audit. It is advisable to work with a qualified tax professional familiar with renewable energy accounting to ensure compliance with IRS rules.
When claiming depreciation, the business must file the appropriate forms along with its federal tax return. The depreciation schedule should list the solar property separately, showing the cost basis, recovery period, and depreciation method. Consistent reporting helps maintain transparency and minimizes future disputes with tax authorities.
Planning Strategies for Businesses
Businesses considering solar investments should evaluate the timing of installation and commissioning to capture the most favorable depreciation benefits. Completing a project before the bonus depreciation rate declines can produce a larger first-year deduction, improving immediate cash flow.
For companies with multiple planned installations, it may be beneficial to stage projects in a way that aligns with the remaining higher bonus rates. Strategic scheduling can deliver measurable financial advantages while still supporting broader sustainability goals.
Another key consideration is how depreciation interacts with other incentives, such as state tax credits or renewable energy grants. Some programs may affect the federal tax basis or limit eligibility for certain deductions. Integrated tax planning helps avoid conflicts between overlapping incentives and ensures that each benefit is used to its fullest legal extent.
Businesses should also model long-term returns under different depreciation scenarios. While the upcoming changes may reduce initial deductions, the overall financial case for solar remains strong. Energy savings, federal credits, and long-term asset value continue to make solar an attractive investment for commercial and industrial operators.
Common Pitfalls to Avoid
Several common errors can reduce the tax value of solar depreciation. The most frequent include miscalculating the depreciable basis, applying the wrong bonus depreciation rate, or failing to adjust for the Investment Tax Credit. Another issue arises when businesses incorrectly claim depreciation for systems they do not own.
Improper documentation can also cause issues. Missing invoices or incomplete cost breakdowns may prevent deductions from being approved. Businesses should ensure that all project costs are properly itemized and that each component’s eligibility is verified.
Delays in placing a system in service can also affect the applicable depreciation schedule. The IRS defines “placed in service” as the point when the system is ready and available for use, not merely when construction is complete. Understanding this distinction helps prevent disputes about timing and ensures compliance with the correct depreciation year.
Broader Industry Implications
The shift in depreciation rules reflects a maturing renewable energy market. As solar adoption expands, tax policy continues to evolve to balance investment incentives with long-term fiscal planning. While reduced bonus depreciation means smaller immediate deductions, it also indicates confidence that solar projects can stand on their own financial performance.
For the industry, these adjustments may influence project financing structures. Investors may rely more on long-term power purchase agreements rather than rapid tax recovery. Developers might adjust pricing models to reflect slower depreciation schedules. Overall, the market remains robust, but businesses must adapt their financial strategies to align with the new conditions.
Moving Forward with Smart Tax Planning
The reduction in bonus depreciation does not diminish the long-term value of solar assets. Lower energy costs, stable performance, and continued federal incentives make solar power a strong investment for commercial operations.