For businesses considering solar, the financial value of a photovoltaic system extends beyond lower electricity costs. Federal tax rules may also allow qualifying businesses to recover a portion of their investment through commercial solar depreciation.
Depreciation allows businesses to deduct the cost of qualifying property used to generate income over time, or, when eligible, accelerate those deductions. In 2026, the rules surrounding solar depreciation deserve particular attention because federal tax legislation has changed how certain clean-energy property and bonus depreciation are treated.
Understanding these rules can help businesses, developers, and commercial property owners evaluate the true after-tax economics of a solar investment.
What is commercial solar depreciation?
Commercial solar depreciation is a tax mechanism that allows eligible businesses to recover the cost of qualifying solar property through deductions against taxable income.
The IRS generally allows depreciation for property that:
- Is owned by the taxpayer
- Is used for business or income-producing activities
- Has a determinable useful life
- Is expected to last longer than one year
Most business property placed in service after 1986 is depreciated using the Modified Accelerated Cost Recovery System (MACRS).
For a commercial solar project, potentially depreciable costs can include qualifying equipment and certain associated project expenses. Exactly what qualifies depends on the project’s structure and applicable tax rules, so businesses should establish their tax basis with a qualified tax professional.
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How MACRS works for commercial solar
MACRS allows businesses to recover the tax basis of eligible property according to an established recovery period and depreciation method.
Historically, solar energy property has commonly been discussed as five-year MACRS property. However, the rules changed for projects beginning construction after December 31, 2024, so businesses should be careful with older solar depreciation guides.
IRS Publication 946 states that P.L. 119-21 removed solar and wind property from the specific five-year-property provision under IRC Section 168(e)(3)(B)(vi) for property beginning construction after December 31, 2024. At the same time, other categories added by the clean-energy provisions, including certain qualified facilities, qualified property under Section 48E, and energy storage technology placed in service after December 31, 2024, can qualify as five-year property.
That distinction is particularly important in 2026. Businesses should not automatically assume that every new commercial solar installation receives the same five-year MACRS treatment used in older examples.
What is bonus depreciation?
Bonus depreciation allows eligible businesses to deduct a larger portion of qualifying property in the year it is placed in service instead of recovering the entire basis through the normal MACRS schedule.
Current IRS guidance states that certain qualified property acquired and placed in service after January 19, 2025, may qualify for a 100% special depreciation allowance.
In practical terms, qualifying property may potentially have its eligible depreciable basis deducted in the first year rather than spread over several years.
This can make depreciation particularly valuable to businesses with sufficient taxable income because accelerating deductions can improve near-term project cash flow.
However, eligibility depends on the property, acquisition date, placed-in-service date, ownership structure, and other tax requirements. A business should not assume its entire solar project automatically qualifies for 100% bonus depreciation.
Depreciation vs. a solar tax credit
Depreciation and tax credits work differently.
A tax credit generally reduces tax liability dollar for dollar, subject to applicable rules. A depreciation deduction reduces taxable income.
Consider a simplified example. If a business receives a $20,000 depreciation deduction and is subject to a 21% federal income tax rate, the deduction could represent approximately $4,200 in federal income-tax savings, assuming the business can fully use the deduction.
That is different from a $20,000 tax credit, which could potentially reduce tax liability by $20,000.
Commercial solar projects may potentially benefit from both tax credits and depreciation, but claiming a credit can affect the depreciable basis.
How tax credits can affect depreciable basis
This is one of the most important concepts when calculating commercial solar depreciation.
When certain investment tax credits are claimed, businesses generally cannot depreciate the entire original project cost without adjustment. Historically, qualifying commercial solar projects claiming an investment tax credit have generally reduced their depreciable basis by half of the credit amount.
For example, under a simplified scenario involving a $100,000 project and a 30% qualifying investment credit:
- Original project basis: $100,000
- Tax credit: $30,000
- Half of credit: $15,000
- Adjusted depreciable basis: $85,000
A DOE financing example similarly illustrates that a commercial PV project receiving a 30% ITC would generally have an 85% depreciable basis before applying the relevant depreciation rules. (Energy Efficiency and Renewable Energy)
This is why simply adding the full value of a tax credit to depreciation savings can overstate the project’s tax benefits.
A simplified commercial solar depreciation example
Suppose a business installs a qualifying solar project costing $500,000.
If the project qualifies for a 30% investment tax credit, the credit would equal:
$500,000 × 30% = $150,000
The depreciation basis could then be reduced by half the credit:
$150,000 ÷ 2 = $75,000
That produces an adjusted depreciable basis of:
$500,000 − $75,000 = $425,000
If that $425,000 of basis qualifies for 100% bonus depreciation and the business can fully utilize the deduction, it could potentially deduct the eligible amount in the year the property is placed in service.
The actual tax savings would then depend on the taxpayer’s applicable federal and state tax rates and other circumstances.
This is an illustrative example only. Real projects can involve additional rules governing basis, credit eligibility, bonus depreciation, project ownership, and state tax treatment.
Why the placed-in-service date matters
Depreciation generally begins when property is placed in service, not simply when it is purchased.
The IRS defines the placed-in-service date as the point when property is ready and available for its specific business or income-producing use. (IRS)
For commercial solar, this makes project timing important.
Ordering panels in December does not necessarily mean the business can claim depreciation for that tax year. If the system is not ready and available for operation until the following year, depreciation generally begins in that later year.
Businesses planning installations near year-end should therefore coordinate project completion, commissioning, accounting, and tax planning carefully.
Federal and state depreciation may differ
Federal eligibility does not automatically determine state tax treatment.
States can conform to federal depreciation rules, partially conform, or establish their own treatment. This means a project eligible for accelerated federal depreciation may receive different treatment on the business’s state income-tax return.
The reference article from 1 Source Solar similarly notes that state conformity varies and that some states have decoupled from federal bonus-depreciation provisions. (1 Source Solar)
Businesses operating in multiple states should evaluate each project’s state-specific tax treatment separately.
Why commercial solar depreciation matters for ROI
Solar project economics are often presented primarily through electricity savings and simple payback periods.
For businesses, that can provide an incomplete picture.
A commercial solar financial model may need to consider:
- Initial project cost
- Electricity savings
- Demand-charge reductions
- Federal tax incentives
- State and local incentives
- Depreciation deductions
- Financing costs
- Operations and maintenance
- Equipment degradation
- System lifespan
Accelerated depreciation can improve early project cash flow by moving deductions forward. The economic value of that acceleration depends on the business’s tax position and its ability to use those deductions.
Common commercial solar depreciation mistakes
Businesses should avoid several common assumptions.
First, don’t automatically apply older five-year MACRS guidance to a 2026 project. Federal rules have changed, and construction and placed-in-service dates matter.
Second, don’t calculate depreciation using the full project cost without determining whether a tax credit requires a basis adjustment.
Third, don’t assume federal bonus-depreciation treatment automatically applies at the state level.
Finally, remember that depreciation is a deduction, not a dollar-for-dollar refund. Its financial value depends on the taxpayer’s circumstances.
Conclusion
Commercial solar depreciation can significantly influence the economics of a business solar investment, particularly when accelerated depreciation allows qualifying costs to be recovered earlier.
In 2026, however, businesses need to pay close attention to current rules. IRS guidance reflects changes to the traditional treatment of solar property, while certain qualified clean-energy property may still receive five-year MACRS classification. Current federal law also provides a 100% special depreciation allowance for certain qualifying property acquired and placed in service after January 19, 2025.
For businesses evaluating solar, depreciation should therefore be modeled alongside available tax credits, electricity savings, financing, and state incentives, not treated as a standalone percentage of project cost.
Because eligibility and tax treatment depend heavily on individual project circumstances, businesses should confirm depreciation assumptions with a qualified tax professional before incorporating them into an investment decision.
Frequently Asked Questions
What is commercial solar depreciation?
Commercial solar depreciation allows qualifying businesses to deduct the cost or adjusted basis of eligible solar-related property used in a business or income-producing activity.
Is commercial solar always depreciated over five years?
Not necessarily. Older guidance frequently treats solar as five-year MACRS property, but federal law changed for solar and wind property beginning construction after December 31, 2024. Certain qualified clean-energy property and energy storage may still qualify as five-year property under other provisions.
Is 100% bonus depreciation available in 2026?
IRS guidance states that certain qualified property acquired and placed in service after January 19, 2025, can qualify for a 100% special depreciation allowance. Eligibility depends on the specific property and circumstances. (IRS)
When does solar depreciation begin?
Generally, depreciation begins when the property is placed in service, meaning it is ready and available for its intended business use.
Can businesses claim a solar tax credit and depreciation?
Potentially, yes, when the project meets the applicable requirements. However, claiming an investment credit can require an adjustment to the project’s depreciable basis.