What Is Solar Bonus Depreciation for Businesses?
A key tax deduction for business solar projects, bonus depreciation's value is shaped by timing and interaction with other federal incentives.
Solar bonus depreciation is a federal tax incentive that permits businesses to accelerate the depreciation of qualifying solar energy systems. This allows for the deduction of a large percentage of the asset’s cost in the first year it is operational, rather than spreading that deduction over a multi-year period. The policy aims to lower the initial financial barrier for businesses to invest in renewable energy by providing an immediate reduction in taxable income, which improves cash flow and shortens the payback period.
Qualifying Solar Property and Placed-in-Service Rules
To be eligible for bonus depreciation, a solar energy system must consist of property that meets specific criteria. This includes the solar panels, inverters that convert the electricity from direct current (DC) to alternating current (AC), racking and mounting equipment, and wiring. Following the Inflation Reduction Act of 2022, energy storage devices like batteries are also eligible, including standalone systems not connected to solar, provided they have a capacity of at least 5 kilowatt-hours (kWh). The equipment can be new or, under rules established by the Tax Cuts and Jobs Act of 2017, used property can also be eligible if certain acquisition requirements are met.
A central requirement is that the solar equipment must be classified as Modified Accelerated Cost-Recovery System (MACRS) property with a recovery period of 20 years or less. Solar energy property falls into the five-year property class under MACRS, making it eligible for this accelerated deduction.
The timing of the deduction is determined by the “placed-in-service” date. This is a key concept that refers to the date the property is ready and available for its specific use in the business, not necessarily the date it was purchased or installed. For a solar energy system, this is the day it is fully installed, tested, and approved by the utility to be interconnected to the grid. The placed-in-service year dictates which bonus depreciation percentage a business can claim, making it a key date for tax planning.
Current Bonus Depreciation Rates and Phase-Down Schedule
The bonus depreciation percentage available for solar assets is subject to a scheduled phase-down. This reduction was established by the Tax Cuts and Jobs Act of 2017, which initially set the rate at 100% for property acquired and placed in service after September 27, 2017, and before January 1, 2023. This allowed businesses to deduct the full cost of their solar investment in the first year.
The rate is now decreasing by 20 percentage points each year. For systems placed in service in 2024, the rate was 60%, and it will decrease to 40% for 2025 and 20% for 2026. After 2026, the bonus depreciation provision is scheduled to phase out completely. However, legislation has been proposed in Congress that would restore 100% bonus depreciation, which could potentially affect the rate for assets placed in service in 2025.
The applicable rate is locked in based on the year the solar system is officially placed in service. For example, a business that purchased a system in late 2025 but did not have it fully operational and connected to the grid until early 2026 would be subject to the 20% rate for 2026, not the 40% rate from the purchase year.
Interaction with the Solar Investment Tax Credit
Businesses investing in solar often utilize both bonus depreciation and the federal Investment Tax Credit (ITC), but the two incentives have a specific interaction that must be accounted for. The ITC is a separate, dollar-for-dollar credit against federal tax liability, currently valued at 30% of the total project cost for most commercial systems. When a business claims the ITC, it is required to reduce the depreciable basis of the solar asset.
This mandatory basis reduction is equal to one-half of the value of the ITC claimed. For a project claiming the standard 30% ITC, the reduction amounts to 15% of the project’s cost. This new, lower basis is the amount used to calculate any depreciation deductions, including bonus depreciation. This rule prevents a business from receiving a full tax credit and a full depreciation deduction on the same expenditure.
A clear example illustrates this rule. Consider a business that installs a solar energy system for a total cost of $200,000. It is eligible for a 30% ITC, which amounts to a $60,000 tax credit ($200,000 x 30%). The business must then reduce its depreciable basis by half of the credit’s value, which is $30,000 ($60,000 / 2). The new basis for calculating depreciation becomes $170,000 ($200,000 – $30,000). This adjusted figure is the starting point for applying the bonus depreciation percentage.
Calculating and Claiming the Deduction
To calculate the bonus depreciation deduction, a business must synthesize the project cost, the ITC basis reduction, and the correct bonus percentage for the placed-in-service year. The process begins with the total cost of the solar installation.
Using the earlier example, a $200,000 solar project placed in service in 2025 would have its basis reduced to $170,000 after accounting for the 30% ITC. The bonus depreciation rate for 2025 is 40%. The first-year bonus depreciation deduction would therefore be $68,000 ($170,000 x 40%). The remaining 60% of the basis, or $102,000, would then be depreciated over the standard five-year MACRS schedule, starting in the same year.
The action of claiming this deduction is done by filing IRS Form 4562, Depreciation and Amortization, with the business’s annual federal tax return. Part II of this form is specifically designated for the “Special Depreciation Allowance,” which is where the bonus depreciation amount is reported. It is important to maintain detailed records of all project costs, the placed-in-service date, and the ITC calculation to support the figures reported on the form.