Solar Panel Depreciation: Bonus, MACRS, and Recapture Rules

Solar panel depreciation for a business system in 2026 works in three steps: subtract half of any federal investment tax credit from your installed cost to get your depreciable basis, then either write off the entire basis in year one under 100% bonus depreciation or spread it across six tax years under standard MACRS. The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored full first-year bonus depreciation for property acquired after January 19, 2025, which makes the year-one write-off the default result for most business solar installations placed in service now.¹

Which Solar Property You Can Depreciate

The system has to be used in a trade or business, or held to produce income. Panels on the home you live in don’t qualify for depreciation, though they may be eligible for the residential clean energy credit instead. The system also has to be “placed in service,” meaning installed, connected, and ready to generate electricity. That date starts your depreciation clock and locks in which rules apply.

Depreciable components include the photovoltaic panels, inverters, racking and mounting hardware, wiring, conduit, and other parts integral to operation. Battery storage charged exclusively by the solar array qualifies too. Costs that serve a separate purpose don’t. A roof replacement done alongside the installation is not depreciable as solar property unless the roofing material itself generates electricity, such as solar shingles. Only components necessary to the solar system and serving no independent purpose count.

Reduce Your Basis by Half the Investment Tax Credit

If you claim the federal investment tax credit, you must reduce your depreciable basis before you calculate any deduction. Section 50(c) generally requires a full basis reduction equal to the credit, but a special rule for energy credits and clean electricity investment credits cuts that in half: you subtract only 50% of the credit from your basis.²

For a $100,000 installation claiming a 30% credit:

Credit amount: $100,000 × 30% = $30,000
Basis reduction: $30,000 × 50% = $15,000
Adjusted depreciable basis: $100,000 − $15,000 = $85,000

The $85,000 is the number you depreciate. Not the original cost. Skipping this adjustment inflates every year’s deduction and creates an audit exposure.

100% Bonus Depreciation in Year One

For solar property acquired after January 19, 2025, 100% bonus depreciation lets you deduct the entire adjusted basis in the year the system is placed in service.¹ The phase-down schedule that had dropped bonus to 60% in 2024 and 40% in 2025 no longer applies.

Using the $85,000 basis from above, the full $85,000 comes off in year one. Nothing remains to depreciate in later years. Add the $30,000 credit and a $100,000 system produces $115,000 of first-year tax benefits, though the deduction’s cash value depends on your marginal rate.

Bonus is automatic. You don’t elect into it. You can elect out for an entire asset class if you’d rather spread the deductions, which some taxpayers do when current-year income is low and future income is expected to be higher. Unlike Section 179, bonus depreciation can create or increase a net operating loss that you carry forward.

Standard MACRS if You Elect Out of Bonus

Solar systems that began construction before January 1, 2025, are 5-year property under Section 168(e)(3)(B).³ The 5-year MACRS schedule uses the 200% declining balance method with the half-year convention, which treats property as placed in service at the midpoint of the year and stretches the cost across six tax years:⁴

Year 1: 20.00%
Year 2: 32.00%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%

Applied to the $85,000 basis:

Year 1: $17,000
Year 2: $27,200
Year 3: $16,320
Year 4: $9,792
Year 5: $9,792
Year 6: $4,896

If more than 40% of the property you place in service during the year falls in the last quarter, you use the mid-quarter convention instead, which typically shrinks the year-one deduction for a fourth-quarter install.

Section 179 as an Alternative

Section 179 is a separate route to a first-year deduction. For 2026, the maximum Section 179 deduction is $2,560,000, phasing out dollar-for-dollar once qualifying property placed in service crosses $4,090,000. Solar systems used in the active conduct of a trade or business qualify.

The differences matter. Section 179 lets you pick specific assets to expense, while bonus applies to every asset in the same class. Section 179 also cannot create or increase a business loss; the deduction is capped at your taxable business income, with any excess carrying forward. For most solar installations in 2026, 100% bonus is simpler and more useful because it has no income limitation. Section 179 becomes the better tool when you want to expense one solar asset without affecting the rest of the class, or when your state doesn’t conform to federal bonus depreciation.

Recovery Period Changes for Systems Starting Construction After 2024

Section 70509 of the One Big Beautiful Bill Act removed solar energy property from the statutory 5-year MACRS class for systems that began construction after December 31, 2024.⁵ Systems that began construction before that date keep 5-year treatment.

For systems starting construction in 2025 or later, the IRS is still issuing guidance on classification. Property with no specific statutory class and no established class life generally defaults to 7-year property, though certain qualified clean energy facilities placed in service after 2024 may still get 5-year treatment through separate Inflation Reduction Act provisions. In practice, this distinction matters mainly if you elect out of bonus depreciation, because 100% bonus wipes out the entire adjusted basis in year one regardless of the assigned recovery period. If you’re relying on the standard MACRS schedule, confirm the classification for your specific project with a tax professional before filing.

Passive Activity Loss Limits Can Suspend the Deduction

Big depreciation deductions don’t always turn into immediate tax savings. If you invest in a solar project but don’t materially participate in operating it, the deductions are passive activity losses under Section 469. Passive losses can only offset passive income. They can’t reduce wages, active business profits, or portfolio income.

Material participation generally requires more than 500 hours a year in the activity, or more than 100 hours when no one else participates more. Most passive solar investors, such as limited partners in a solar fund, won’t meet these tests. Their deductions and credits sit suspended until they generate passive income from that or another passive activity, or until they dispose of their entire interest.

The limit applies to individuals, trusts, estates, closely held C corporations, and personal service corporations. It doesn’t apply at the partnership or S corporation level, but it does apply to individual partners and shareholders when the losses flow through to them. If tax benefits are your main reason for a solar investment, run the projected deductions through the passive activity rules first.

Recapture on Sale or Conversion

Front-loaded deductions come with a future cost if you dispose of the system early. Two recapture mechanisms can hit at once.

Depreciation Recapture Under Section 1245

Solar panels are personal property, not real estate, so any gain on sale is taxed as ordinary income up to the amount of depreciation you previously deducted. Claim $85,000 in bonus depreciation and sell later for $50,000, and the entire $50,000 gain is ordinary income rather than capital gain. The tax savings from aggressive first-year deductions don’t disappear on disposition; they get recaptured.

Investment Tax Credit Recapture

The ITC vests over five years. If the system stops being investment credit property inside that window because you sell it, stop using it for business, or drop business use below the threshold, you repay a portion of the credit. Recapture decreases 20 points a year:²

Within year 1: 100%
Within year 2: 80%
Within year 3: 60%
Within year 4: 40%
Within year 5: 20%
After year 5: no recapture

On a $30,000 credit, selling three years in means repaying $18,000. The recaptured amount is added to your tax bill in the year of disposition. When the credit is recaptured, your depreciable basis increases by 50% of the recaptured amount, partially offsetting the hit.²

Reporting on Form 4562

All depreciation deductions, including bonus depreciation and Section 179 elections, go on IRS Form 4562, Depreciation and Amortization.⁶ File Form 4562 in the year the system is placed in service and in any later year you claim a depreciation deduction on it. The form asks for the placed-in-service date, the initial cost, any bonus depreciation or Section 179 deduction, and the remaining MACRS deduction. Qualifying solar property falls under the 5-year recovery period category on the form.

Form 4562 is required for the year the property is placed in service, any year you claim a Section 179 deduction, and any year depreciation is claimed on a corporate return other than an S corporation.⁷ The total flows to Schedule C for a sole proprietorship or single-member LLC, or to Schedule E for a rental property. Either way, the deduction reduces the net income on that schedule and, in turn, adjusted gross income on Form 1040.

Keep purchase invoices, installation contracts, placed-in-service documentation, and ITC election records. The IRS can examine depreciation claims for any open tax year, and the five-year ITC recapture window means credit eligibility may be reviewed well after the original return was filed.

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
2
Office of the Law Revision Counsel. 26 U.S. Code 50 – Other Special Rules
3
Internal Revenue Service. Cost Recovery for Qualified Clean Energy Facilities, Property and Technology
4
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
5
Internal Revenue Service. Publication 946 – How To Depreciate Property
6
Internal Revenue Service. Form 4562 – Depreciation and Amortization
7
Internal Revenue Service. Instructions for Form 4562 – Depreciation and Amortization