A business that installs a solar energy system in 2026 can use bonus depreciation for solar to write off 100% of the system’s depreciable cost in the first year it’s placed in service. The One Big Beautiful Bill Act, signed on July 4, 2025, made the 100% rate permanent and ended the phase-down that had been shrinking the deduction since 2023.1Internal Revenue Service. One, Big, Beautiful Bill Provisions You can claim this deduction alongside the federal Investment Tax Credit on the same installation, but the depreciable basis has to be reduced first so the two benefits don’t overlap.
What Solar Property Qualifies
The tax code treats equipment that uses solar energy to generate electricity, heat or cool a structure, or produce solar process heat as eligible. Swimming pool heaters are specifically excluded.2Office of the Law Revision Counsel. 26 U.S. Code 48 – Energy Credit Qualifying components include panels, inverters, wiring, mounting racks, structural supports, and storage batteries that charge exclusively from the array.
The property must be tangible, used in a U.S. trade or business, and originally placed in service by you (reconstructed equipment counts if you’re the first to put the rebuilt system into service). The building the array sits on is not part of the depreciable equipment. A roof installed to support panels doesn’t qualify on its own, but the racking, wiring, and panels attached to it do. The test is functional: if a component exists only to generate solar energy, it’s in; if it serves the building structurally regardless, it’s out.
The deduction is tied to the “placed in service” date, not the contract date or when you paid. A grid-connected system is placed in service when it’s fully installed, interconnected, operational, and available for use. Miss that milestone by December 31 and the deduction slides into the following tax year.
The 100% Rate and What It Replaced
The OBBB set bonus depreciation permanently at 100% for qualified property acquired and placed in service after January 19, 2025.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System For a system installed in 2026, the entire depreciable cost is deducted in year one. Nothing carries forward on the depreciation schedule.
The change is not retroactive. Systems placed in service before January 20, 2025 stay on the phase-down rate that applied in their year, and you can’t amend prior returns to grab the higher rate.
The OBBB also removed solar energy property from the five-year MACRS class where construction began after December 31, 2024. Solar projects that began construction earlier keep that five-year classification. For most taxpayers this is invisible, because 100% bonus depreciation wipes out the basis in year one regardless of the recovery period. It matters if you elect out of bonus depreciation, because the fallback schedule is now much longer, potentially 20 years.4Internal Revenue Service. Cost Recovery for Qualified Clean Energy Facilities, Property and Technology
Stacking Bonus Depreciation With the Investment Tax Credit
The ITC is a dollar-for-dollar reduction of tax owed. Bonus depreciation is a deduction against income. You can claim both on the same solar system, but federal law reduces the depreciable basis by 50% of the ITC amount before you calculate depreciation.5Office of the Law Revision Counsel. 26 U.S. Code 50 – Other Special Rules The full credit still flows to your return; only the depreciable amount shrinks.
Order matters: calculate the ITC first, apply the basis reduction, then run bonus depreciation on what’s left. For a $500,000 system qualifying for a 30% ITC:
- ITC: 30% × $500,000 = $150,000 credit
- Basis reduction: 50% × $150,000 = $75,000
- Adjusted depreciable basis: $500,000 − $75,000 = $425,000
- Bonus depreciation: 100% × $425,000 = $425,000 first-year deduction
At a 21% corporate rate, the deduction saves $89,250 in federal tax. Combined with the $150,000 credit, the first-year federal benefit reaches $239,250 on a $500,000 installation, before any energy savings or state incentives.
ITC Timing Windows That Affect 2026 Projects
The ITC itself is being phased out for solar, and the credit that applies depends on when construction began. Projects that began construction after 2024 fall under Section 48E, the technology-neutral clean electricity investment credit. The base rate is 6% of eligible cost, rising to 30% when prevailing wage and apprenticeship requirements are met during construction. Additional bonus credits may apply for domestic content, energy communities, or low-income community siting.
The OBBB terminates Section 48E for solar and wind projects placed in service after December 31, 2027. A transition rule protects projects that begin construction on or before July 4, 2026, letting them claim the full credit as long as they’re placed in service within the standard continuity period, generally four years from the construction start. Projects that begin construction after July 4, 2026 must be placed in service by December 31, 2027 to qualify at all.
If you’re planning a solar installation, breaking ground before July 4, 2026 preserves your ITC eligibility even if the project takes years to finish. After that date, you’re on an 18-month runway.
When Electing Out Makes Sense
You can elect out of bonus depreciation, but the election applies to every asset in the same MACRS class placed in service that year. No cherry-picking.
The main reason to elect out is a mismatch between the deduction and your income. A $425,000 write-off that creates a net operating loss isn’t lost, since NOLs carry forward indefinitely, but an NOL deduction in a future year is capped at 80% of that year’s taxable income. Depending on your projections, spreading the deduction could produce more total tax savings than taking it all up front.
Before the OBBB, opting out still left you with five-year MACRS depreciation. That safety net is gone for post-2024 construction starts, and the fallback schedule can now stretch to two decades. Model it carefully with a tax advisor before electing out.
How to Claim It on the Return
Bonus depreciation goes on IRS Form 4562, Depreciation and Amortization, on Line 14, “Special depreciation allowance for qualified property placed in service during the tax year.”6Internal Revenue Service. Form 4562 – Depreciation and Amortization Form 4562 is filed with your annual business return: Form 1120 for corporations, Schedule C or Schedule E for individuals with business income.7Internal Revenue Service. Instructions for Form 4562
The ITC is reported separately on Form 3468, Investment Credit.8Internal Revenue Service. About Form 3468, Investment Credit Finalize the ITC first, since its size drives the basis reduction that feeds into the depreciation calculation.
To elect out of bonus depreciation, attach a written statement to your timely filed return identifying the property class covered by the election. Leaving Line 14 blank isn’t enough; the IRS requires the affirmative statement.
State Conformity Isn’t Automatic
Federal bonus depreciation doesn’t automatically apply on your state return. Many states either decouple entirely or require partial add-backs, meaning income you offset federally in year one may still be taxable at the state level. Most decoupling states still allow standard depreciation over the recovery period, so the deduction isn’t permanently lost, just stretched out. Check your state’s current rules before finalizing projections. Many states haven’t yet updated their codes to address the OBBB’s permanent 100% rate.
Recapture in the First Five Years
Both the ITC and the depreciation deductions can be partially clawed back if the system is disposed of or stops qualifying within five years of being placed in service. ITC recapture decreases by 20 percentage points a year: 100% in year one, then 80%, 60%, 40%, and 20%.5Office of the Law Revision Counsel. 26 U.S. Code 50 – Other Special Rules After five full years, the exposure is gone.
Selling the property, converting it from business to personal use, or permanently decommissioning the system can trigger recapture. Producing less energy than projected does not, as long as the system remains a functioning solar facility.
Depreciation recapture also comes into play if you later sell the system at a gain. Gain up to the amount of prior depreciation is taxed as ordinary income rather than capital gain, and with a full first-year write-off that number is large. On a $425,000 first-year deduction, the first $425,000 of sale proceeds allocable to the equipment would be ordinary income. If there’s any chance the property or the underlying real estate changes hands in the first several years, build that exposure into the plan.