Solar Panel Depreciation: How MACRS Works for Business Solar Systems
Short answer
A business that owns its solar system can depreciate it. Solar that qualifies for the Section 48E credit is 5-year MACRS property, and the depreciable basis is cost minus half the credit, so a 30% credit leaves 85% to deduct. For property acquired after January 19, 2025, 100% bonus depreciation lets a business deduct that whole basis in year one.
Depreciation for solar panels is the second large federal tax benefit of commercial solar, next to the investment credit. It turns the cost of panels, inverters, racking and wiring into deductions that lower taxable income, often within the first year.
The rules changed in 2025. A July 2025 federal law (Public Law 119-21, often called the One Big Beautiful Bill Act) restored 100% bonus depreciation, set deadlines for the solar credit and changed how solar fits into the 5-year class. This guide explains the rules as of late 2026, shows the math on a worked example and lists the mistakes that cost businesses money. It is general information, not tax advice: confirm your own situation with a tax professional before you file.
Who can depreciate solar panels?
Depreciation is only for property used in a trade or business or held to produce income. The person or company that owns the system claims it, and only for the share used for business.
- Businesses and farms that buy a system for their own buildings, barns or ground mounts can depreciate it.
- Landlords can generally depreciate solar installed on a rental property, because the building is income-producing.
- Homeowners cannot depreciate panels on a personal residence. The 30% residential credit (Section 25D) also ended for expenses made after December 31, 2025, so homeowners who buy a system now get neither benefit.
- Lease and PPA customers do not own the equipment, so the developer claims the credit and depreciation. Our guide to solar PPA vs lease explains how some of that value can come back through a lower rate.
- Mixed use, such as a farmhouse and a barn on one meter, means only the business-use share is depreciable. Document how you set the split.
What depreciation schedule do solar panels use?
Under the general MACRS system, qualifying solar is 5-year property using the 200% declining balance method and, in most cases, the half-year convention. That spreads the basis over six tax years, because the first and last years each count as half a year. The rates come from Table A-1 in IRS Publication 946.
| Tax year | MACRS rate | Deduction on $170,000 basis | Tax value at 21% |
|---|---|---|---|
| 1 | 20.00% | $34,000 | $7,140 |
| 2 | 32.00% | $54,400 | $11,424 |
| 3 | 19.20% | $32,640 | $6,854 |
| 4 | 11.52% | $19,584 | $4,113 |
| 5 | 11.52% | $19,584 | $4,113 |
| 6 | 5.76% | $9,792 | $2,056 |
| Total | 100% | $170,000 | $35,700 |
The $170,000 basis comes from the worked example further down. The 21% rate is the federal corporate rate, used here only as an example. Pass-through owners pay their own individual rates, and state income tax can add to the value.
What changed for the 5-year class in 2025
Solar used to be 5-year property because it was “energy property” under the old Section 48 credit. Section 70509 of the 2025 law removed solar and wind from that definition for property that begins construction after December 31, 2024. A separate rule still treats property that qualifies for the newer Section 48E clean electricity investment credit, and placed in service after 2024, as 5-year property.
In practice, a project that earns the 48E credit keeps the 5-year schedule. A project that misses the 48E deadlines may fall into a longer recovery class. That is a question to settle with your tax adviser before you sign a contract, not after.
How does the tax credit reduce the depreciable basis?
When a business claims an investment credit, it must reduce the depreciable basis of the property by half of the credit. The other half of the credit is effectively “free” of any depreciation give-back.
Example: $200,000 − ($60,000 × 0.5) = $170,000
The credit rate depends on project size and labor rules. Under 48E the base rate is 6%. It rises to 30% for projects under 1 MW AC or projects that meet prevailing wage and apprenticeship rules, and bonus adders (such as domestic content or an energy community location) can lift it further. The table shows how each rate changes the basis on the same $200,000 example system.
| Credit rate | Credit | Basis reduction | Depreciable basis | Share of cost |
|---|---|---|---|---|
| No credit | $0 | $0 | $200,000 | 100% |
| 6% (base rate) | $12,000 | $6,000 | $194,000 | 97% |
| 30% | $60,000 | $30,000 | $170,000 | 85% |
| 40% (one adder) | $80,000 | $40,000 | $160,000 | 80% |
| 50% (two adders) | $100,000 | $50,000 | $150,000 | 75% |
A higher credit always wins overall. Going from 30% to 40% adds $20,000 of credit but removes only $10,000 of deductions, which is worth about $2,100 at a 21% rate.
Is bonus depreciation 100% for solar in 2026?
Yes, for most new projects. The 2025 law reinstated the 100% special depreciation allowance for qualified property acquired after January 19, 2025, and IRS Notice 2026-11 confirms the rate is now permanent with no phase-down. Many older articles still show 40% for 2025, 20% for 2026 and 0% for 2027. That schedule came from the 2017 tax law and no longer applies to property acquired after the cutoff.
The key date is when the property was acquired, not only when it was installed:
- Property bought under a written binding contract signed before January 20, 2025 stays on the old phase-down rates.
- For a self-built system, acquisition starts when significant physical work begins. A safe harbor treats that as the point when more than 10% of total cost is paid or incurred.
- For the first tax year ending after January 19, 2025, a business could elect 40% instead of 100%.
- A business can also elect out of bonus depreciation for a whole class of property in any year and use regular MACRS.
Bonus depreciation is not a separate deduction on top of MACRS. It takes all or part of the basis in year one, and any remainder runs through the regular schedule.
Worked example: depreciation on a 100 kW business system
Take a business that installs a 100 kW roof system in 2026 for an example cost of $200,000 ($2.00 per watt). This is an illustration, not a price quote; installed costs vary widely by site and size, so run your own figure through the solar panel cost calculator. Using the site’s standard assumption of 1,100 to 1,600 kWh per kW a year, the system makes about 110,000 to 160,000 kWh annually. The 100 kW solar system guide covers sizing and grid connection for this class of project.
Assumptions: construction began in time for the 48E credit, the project qualifies for 30%, the business pays a 21% federal rate and has enough taxable income to use the deductions.
| Item | 100% bonus | 40% bonus election | Regular MACRS only |
|---|---|---|---|
| 48E credit (30%) | $60,000 | $60,000 | $60,000 |
| Depreciable basis | $170,000 | $170,000 | $170,000 |
| Year 1 depreciation | $170,000 | $88,400 | $34,000 |
| Year 1 tax saved at 21% | $35,700 | $18,564 | $7,140 |
| Year 1 total benefit | $95,700 | $78,564 | $67,140 |
| Net cost after year 1 | $104,300 | $121,436 | $132,860 |
The 40% column takes $68,000 as bonus, then 20% of the remaining $102,000 ($20,400) as regular year-one MACRS. Over six years all three routes deduct the same $170,000, worth $35,700 in total at a flat 21% rate. Bonus depreciation changes timing, not the total.
Timing still matters. Getting $95,700 back in year one instead of $67,140 shortens the payback, which you can test with the solar payback calculator. If the system is financed, compare loan payments against the year-one tax savings with the solar finance calculator.
When regular MACRS can be the better choice
A huge first-year deduction only helps if the business has income to absorb it. A start-up with a small profit, a business expecting a higher tax bracket in later years, or a pass-through owner limited by passive loss rules may get more value by spreading deductions over the 5-year schedule. Your adviser can model both.
What happens if a solar project misses the 48E deadline?
Under the 2025 law, the 48E credit ends for solar facilities placed in service after December 31, 2027, unless construction began by July 4, 2026. IRS Notice 2025-42 says construction begins when physical work of a significant nature starts. The old 5% cost safe harbor is gone except for solar of 1.5 MW AC or less. A project that started on time generally has four calendar years to be placed in service under the continuity safe harbor.
If a project gets no credit, two things change:
- There is no basis reduction, so 100% of the cost is depreciable.
- The project may lose the 5-year class, because solar’s link to 5-year property now runs through 48E. Bonus depreciation can still apply to qualified property, but the regular schedule and state treatment could be slower.
Projects that begin construction after December 31, 2025 must also pass foreign-entity “material assistance” rules to claim the credit. Keep dated records of contracts, equipment orders and physical work, because they prove both the credit start date and the bonus acquisition date.
Common solar depreciation mistakes
- Depreciating the full cost. Forgetting the half-credit basis reduction overstates deductions and can trigger penalties.
- Using old bonus rates. Applying 20% for 2026 to property acquired after January 19, 2025 leaves most of the first-year deduction on the table.
- Assuming your state follows federal rules. Many states do not conform to bonus depreciation, so you may run a separate state schedule.
- Ignoring the mid-quarter convention. If more than 40% of the depreciable property you place in service in a year goes in during the last quarter, the half-year rates in the table above do not apply.
- Selling or converting early. Disposing of the system within five full years of placing it in service can trigger recapture of part of the credit.
- Counting ineligible costs. A new roof is building property on a much longer schedule. Separate roof work from solar equipment on the invoice.
How do you claim solar depreciation?
- Confirm the placed-in-service date: the day the system is ready and available for use, usually after utility permission to operate.
- Calculate the eligible cost, including equipment, labor, permitting and interconnection that belong to the energy property.
- Claim the credit on Form 3468 and reduce the basis by half the credit.
- Report bonus or MACRS depreciation on Form 4562, and attach any election statements.
- Keep records of the contract date, start of physical work, invoices and output data for at least the recovery and recapture periods.
Production records also help you check that the system earns what you expected. Compare actual output with the solar panel output calculator estimate.
Frequently asked questions
Can I depreciate solar panels on my house?
No, not on a personal residence, because depreciation only applies to business or income-producing property. If part of the home is a rental or a qualifying home office, a share may be depreciable. The residential 25D credit also ended for expenses after December 31, 2025, so ask a tax professional how your specific setup is treated.
Is depreciation calculated before or after the solar tax credit?
After. You reduce the depreciable basis by half the credit you claim. With a 30% credit on a $200,000 system, the $60,000 credit cuts the basis by $30,000, leaving $170,000 to depreciate. A production credit under 45Y does not reduce the basis in the same way.
Can I take 100% bonus depreciation on solar in 2026?
Usually, yes. The 2025 law restored 100% bonus depreciation for qualified property acquired after January 19, 2025, and the rate no longer phases down. Property under a binding contract signed before January 20, 2025 keeps the older, lower rates. A business can also elect out and use regular 5-year MACRS instead.
Can I depreciate solar panels on a rental property?
Generally yes, because a rental is income-producing property. The landlord, as owner of the system, depreciates it, and the class and credit treatment follow the business rules described above. If you converted your home to a rental, the basis is usually the lower of cost or fair market value at conversion. Confirm the details with a tax adviser.
Do I get depreciation if I lease solar or sign a PPA?
No. The owner of the equipment claims depreciation and the credit, which in a lease or PPA is the solar company or its investor. Your lease or PPA payments may be deductible as a business expense if the power serves your business, but that is a different deduction from depreciation.
What happens to depreciation if I sell the business or building?
Depreciation you claimed is generally recaptured as ordinary income up to the gain on the equipment. If you sell within five full years of placing the system in service, part of the investment credit can also be recaptured. Plan sales and ownership changes with your tax professional before you close.
