Investing in solar energy can be a game-changer for businesses looking to cut energy costs while benefiting from valuable tax incentives. One of the most significant financial advantages for businesses installing solar panels is the Modified Accelerated Cost Recovery System (MACRS) depreciation, which allows companies to recover the cost of their solar investment more quickly through tax deductions.
Let’s explore how MACRS depreciation works, how it applies to solar energy systems, and how businesses can maximize their tax savings by taking advantage of this incentive.
In This Article:
- What Is MACRS Depreciation?
- How MACRS Applies to Solar Energy Systems
- Eligibility: Which Businesses can Use MACRS for Solar?
- Step-By-Step Guide to Calculating MACRS Depreciation
- Combining MACRS with Other Solar Incentives
- How To Claim MACRS for Solar Energy
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What is MACRS Depreciation?
The Modified Accelerated Cost Recovery System (MACRS) is a tax incentive designed to help businesses recover the cost of certain assets over a fixed period by accelerating depreciation deductions in the early years of ownership. The purpose of MACRS is to encourage capital investments by reducing taxable income, making it easier for businesses to invest in long-term assets such as solar panels, machinery, and equipment.
The IRS categorizes assets into different depreciation classes based on their expected useful life. Solar energy systems qualify as a 5-year property under MACRS (see IRS guideline). This means businesses can depreciate the cost of their solar panels over five years, helping offset the upfront investment more quickly.
How MACRS Applies to Solar Energy Systems
Solar Energy System Classification
Solar photovoltaic (PV) systems (solar panel systems) are classified as 5-year property under MACRS, allowing businesses to recover their costs over a shorter time frame than other commercial property investments (IRS Cost Recovery Table).
Bonus Depreciation
Under the Tax Cuts and Jobs Act (TCJA) of 2017, businesses were eligible for 100% bonus depreciation, allowing them to deduct the entire cost of their solar system in the first year. However, this provision is phasing out. The base depreciation is stepping down by 20% each year until it reaches 0% in 2027:
- 2023: 80% bonus depreciation
- 2024: 60% bonus depreciation
- 2025: 40% bonus depreciation
- 2026: 20% bonus depreciation
- 2027 and beyond: No bonus depreciation
For businesses considering solar, acting before bonus depreciation phases out can significantly increase tax savings.
Eligibility: Which Businesses Can Use MACRS for Solar?
To qualify for MACRS depreciation, businesses must meet the following criteria:
- Own the solar system (leased systems do not qualify).
- Use the system for income-generating activities.
- Ensure the system is installed and placed in service within the tax year of the claim.
Many industries benefit from MACRS depreciation, including:
- Manufacturing – Reducing energy costs in factories.
- Retail & Hospitality – Lowering operational expenses.
- Agriculture – Powering irrigation systems and storage facilities.
- Real Estate – Increasing property value with solar installations.
Can homeowners qualify for MACRS depreciation?
No, homeowners cannot qualify for MACRS unless the home they are installing solar panels on is used for business purposes. For a home business to qualify for MACRS depreciation on their solar panels, they must meet the eligibility requirements above.
Beware, some solar companies are misusing MACRS depreciation and misleading homeowners. If a solar company tells you that simply setting up a business or obtaining a business license can qualify you for MACRS depreciation, this is false. As we outline an article on this topic, residential customers cannot simply setup an LLC or other business and use that to qualify for tax benefits like MACRS depreciation. The solar system has to be used for income-generating activities as part of the business (see edibility requirements above). If a solar company encourages you to setup a business just to take advantage of MACRS depreciation, they could be setting you up to commit tax fraud.
Learn more about how some solar company are MACRS depreciation tax fraud and how you can protect yourself from this scam.
Step-by-Step Guide to Calculating MACRS Depreciation
To determine MACRS depreciation for a solar installation, follow these steps:
- Determine the Total System Cost
- Identify all costs associated with the solar installation, including panels, inverters, labor, permits, and engineering fees.
- Adjust for the Investment Tax Credit (ITC)
- If claiming the 30% ITC, reduce the depreciable basis by half of the ITC amount (15%).
- Example: If the system cost is $100,000, the adjusted depreciable basis is $85,000.
- Apply Bonus Depreciation (if applicable)
- In 2025, businesses can deduct 40% of the depreciable basis in the first year.
- Using the example: 40% of $85,000 = $34,000 deducted immediately.
- Use the MACRS 5-Year Schedule for the Remaining Basis
- After bonus depreciation, the remaining 60% ($51,000) is depreciated over 5 years.
MACRS Depreciation Calculation Example (2025, with Bonus Depreciation)
| Year | Bonus Depreciation | MACRS Percentage | Deduction Amount |
|---|---|---|---|
| Year 1 | 40% ($34,000) | 20% of remaining | $10,200 |
| Year 2 | – | 32% of remaining | $16,320 |
| Year 3 | – | 19.2% of remaining | $9,792 |
| Year 4 | – | 11.52% of remaining | $5,875 |
| Year 5 | – | 11.52% of remaining | $5,875 |
| Year 6 | – | 5.76% of remaining | $2,937 |
By following these steps, businesses can maximize tax savings while reducing the upfront cost burden of their solar investment.
Estimate your total savings, payments, and total energy usage with our FREE solar calculator.
Combining MACRS with Other Solar Incentives
Solar Tax Credit (ITC)
The 30% solar tax credit (also known as Investment Tax Credit, or ITC) significantly reduces the upfront costs of installing solar panels, making solar energy a more financially viable option for businesses. This federal incentive allows businesses to deduct 30% of their solar installation costs from their tax liability, reducing the overall investment burden. When combined with MACRS depreciation, the tax savings can be substantial, further lowering the taxable income and improving the return on investment. The ITC solar tax credit is available for systems placed in service through 2032 before it starts phasing down in subsequent years.
Read our Solar Tax Credit Guide to learn all about the federal solar tax credit, or ITC.
State & Local Incentives
Many states offer additional depreciation incentives, property tax exemptions, and rebates that can further enhance the financial benefits of solar energy adoption. These incentives vary by location and may include grants, sales tax exemptions, or performance-based incentives that reward businesses based on the amount of energy their system generates. To explore available state and local solar incentives, businesses should check DSIRE (Database of State Incentives for Renewables & Efficiency).
How to Claim MACRS for Solar Energy
- Consult a tax professional to ensure accurate depreciation calculations and to fully understand how MACRS applies to your specific business situation. A tax expert can help optimize the benefits of MACRS, ITC, and bonus depreciation while ensuring compliance with IRS regulations.
- File IRS Form 4562 (Depreciation and Amortization) when submitting business tax returns. This form is required to claim MACRS depreciation and should be filled out carefully to reflect the correct depreciation schedule and any applicable deductions. Incorrect filings can lead to IRS audits or delays in tax benefits. Find more information on IRS Form 4562.
- Maintain thorough documentation of all solar system-related expenses, including invoices, contracts, and proof of installation. Proper records should also include system commissioning dates, maintenance reports, and tax credit applications. This documentation is crucial in case of an IRS audit and to support future claims for additional incentives.
Why Now is the Best Time to Invest in Solar
MACRS depreciation is a great opportunity for businesses to save on installing solar panels while also investing in their future energy savings. With bonus depreciation set to phase out, businesses that invest in solar before 2026 will maximize tax savings while taking advantage of current financial incentives. The combination of MACRS depreciation, ITC solar tax credit, and state incentives makes solar a compelling investment, reducing upfront costs and increasing long-term energy savings. However, as these incentives decrease or are phased out, businesses that delay their solar installation risk missing out on substantial tax benefits.
Now is the time to act! Contact Green Ridge Solar today to get your free solar estimate. Green Ridge Solar specializes in helping businesses optimize their solar investment by navigating complex tax incentives, financing options, and installation planning. Don’t wait until it’s too late—secure your savings and energy independence today.
Estimate your total savings, payments, and total energy usage with our FREE solar calculator.
