MACRS Depreciation and Solar: The Tax Benefit Businesses Miss

Published April 28, 2026  ·  11 min read  ·  Part of our Commercial Solar series

What MACRS Is and Why It Matters for Solar

When a business purchases equipment, it generally cannot deduct the full cost in the year of purchase. Instead, the IRS requires that capital assets be depreciated over their useful life, spreading the tax deduction across multiple years. The depreciation method and schedule determine how quickly those deductions can be taken.

MACRS, the Modified Accelerated Cost Recovery System, is the standard depreciation method for US businesses under IRS Publication 946. It assigns each type of asset to a property class with a defined recovery period. Commercial solar equipment is classified as 5-year MACRS property, one of the shorter recovery periods available.

The shorter the recovery period, the faster the deductions. And faster deductions mean real cash savings arrive sooner, improving the ROI calculation significantly.

For context: a commercial building itself is typically depreciated over 39 years. Solar panels on that building are depreciated over 5 years. That difference in schedule is one of the reasons commercial solar ROI often surprises business owners who haven't run the full numbers.

The 5-Year MACRS Schedule

Under the standard MACRS General Depreciation System (GDS), solar equipment uses the 200% declining balance method with a half-year convention. The half-year convention assumes assets are placed in service at the midpoint of the tax year regardless of the actual installation date, which is why the depreciation spans 6 tax years even though the recovery period is 5 years.

The standard depreciation rates for 5-year MACRS property are:

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

These rates add up to 100% and represent the percentage of the depreciable basis that can be deducted in each year.

The ITC Basis Reduction: The Step Most Proposals Skip

Before applying the depreciation schedule, there is a critical adjustment required by IRC Section 50(c): when a business claims the Investment Tax Credit, it must reduce its depreciable basis by 50% of the ITC amount claimed.

This is known as the ITC basis reduction, and it prevents a business from receiving the full benefit of both the ITC and the full depreciation deduction on the same dollar of cost. Many installer proposals and online calculators either ignore this step or get it wrong, which leads to overstated depreciation savings.

Here is how it works in practice. Assume a $200,000 system with a 30% ITC:

• Gross system cost: $200,000
• ITC claimed (30%): $60,000
• Basis reduction (50% of ITC): $30,000
• Depreciable basis: $200,000 − $30,000 = $170,000

The depreciation deductions are calculated on $170,000, not the full $200,000. A calculator that uses the full $200,000 as the depreciable basis is overstating the benefit by $30,000 × (tax rate), which at 21% is $6,300 in overstated savings.

The Full 6-Year Depreciation Schedule: $200,000 System Example

Using the $170,000 depreciable basis from the example above, here is the complete year-by-year depreciation deduction and resulting tax savings at the 21% corporate tax rate:

Over 6 tax years, the full $170,000 depreciable basis generates $35,700 in total tax savings at a 21% corporate rate. Because of the accelerated schedule, the majority of this benefit arrives in years 1 and 2, with 52% of the total deduction taken in the first two years alone.

Bonus Depreciation: Taking Everything in Year 1

The standard MACRS schedule above spreads deductions over 6 years. But under the One Big Beautiful Bill Act, signed into law on July 4, 2025, 100% bonus depreciation was permanently restored for property placed in service in 2025 and later.

With 100% bonus depreciation, a business can deduct the entire $170,000 depreciable basis in the year the system is placed in service, rather than waiting 6 years. At 21%, that generates the same $35,700 in total tax savings, but all in Year 1 instead of spread across six years.

The practical effect: combined with the $60,000 ITC, a business installing a $200,000 system in 2026 can receive $95,700 in total federal tax benefits in Year 1. The effective net cost drops to $104,300 before a single dollar of energy savings is counted.

Whether to take bonus depreciation in Year 1 or use the standard schedule is a decision worth discussing with a tax advisor. Some businesses prefer the standard schedule if they anticipate higher taxable income in future years and want to preserve deductions to offset it. For most businesses, though, the time value of money favors taking the deduction as early as possible.

How the ITC and MACRS Work Together

The ITC and MACRS are additive benefits that stack on top of each other. Here is the complete picture for a $200,000 system at 21% corporate tax rate, using 100% bonus depreciation:

• Gross system cost: $200,000
• Federal ITC (30%): −$60,000
• ITC basis reduction: Depreciable basis reduced to $170,000
• MACRS tax savings (100% bonus, 21% rate): −$35,700
• Effective net cost after all federal incentives: $104,300

The ITC handles 30% of the gross cost directly. MACRS handles an additional 17.85% of the gross cost in tax savings. Together they reduce the effective cost by nearly 48%, which is why the tax-adjusted payback period on commercial solar (typically 4 to 6 years) is so much shorter than the simple payback period (typically 9 to 12 years) that ignores incentives.

ITC Rate Adders and Their Effect on the Basis Reduction

The base ITC rate is 30%, but two adders can increase it to 40% or 50% for qualifying projects. The domestic content adder (10%) applies when the system uses US-manufactured components meeting specific federal sourcing requirements. The energy community adder (10%) applies to systems in areas with a history of fossil fuel employment or on brownfield sites.

If your ITC rate is higher than 30%, the basis reduction calculation changes accordingly. At a 40% ITC rate on a $200,000 system:

• ITC (40%): $80,000
• Basis reduction (50% of $80,000): $40,000
• Depreciable basis: $160,000
• MACRS tax savings at 21%: $33,600

As the ITC rate increases, the depreciable basis decreases, which slightly reduces the MACRS savings. But the net effect is still strongly positive: a higher ITC more than compensates for the reduced depreciation. At 40% ITC, total Year 1 federal tax benefits on a $200,000 system reach $113,600, reducing effective net cost to $86,400.

What to Watch For in Installer Proposals

When reviewing a commercial solar proposal, look specifically at how depreciation is presented. Common issues include:

• No depreciation shown at all. Some proposals only show the ITC. This understates the full federal benefit significantly.
• Depreciation calculated on the full system cost. The depreciable basis must be reduced by 50% of the ITC before calculating MACRS. Using the gross cost overstates depreciation savings by thousands of dollars.
• Bonus depreciation assumed without confirmation. While 100% bonus depreciation is currently available, eligibility depends on when the system is placed in service and the business entity type. A proposal should note these assumptions explicitly.
• Tax rate assumptions not disclosed. MACRS savings depend entirely on the business's marginal tax rate. A proposal that doesn't state the assumed tax rate makes it impossible to verify the numbers.

Our Commercial Solar ROI guide walks through how to build a complete payback analysis from scratch, and our Commercial Solar ROI Calculator handles the ITC basis reduction and MACRS math automatically using your state's rates and your system details.

Who MACRS Applies To

MACRS depreciation is available to any US business that owns the solar system and has a federal income tax liability to offset. This includes C-corporations, S-corporations, LLCs taxed as partnerships or corporations, and sole proprietorships filing Schedule C.

It does not apply to businesses using a PPA or lease structure, since the financing company owns the system in those arrangements and claims the depreciation itself. If you are evaluating financing options for a commercial solar installation, the depreciation benefit is one of the strongest arguments for ownership over a PPA or lease.

Non-profits and tax-exempt entities cannot use MACRS directly. However, they may be eligible for the ITC through a provision called Direct Pay, which allows qualifying tax-exempt organizations to receive the ITC as a cash refund from the IRS rather than a credit against taxes owed. This was introduced under the Inflation Reduction Act and remains available through 2032.