What if you could reduce your tax bill while investing in an asset that lowers your operating costs for decades? That’s not a hypothetical question for business owners considering commercial solar. It’s a real opportunity available right now through bonus depreciation.
But here’s the catch: the window is closing fast. The 40% bonus depreciation rate available in 2025 drops to just 20% on January 1, 2026. For businesses looking to go solar, that timing matters more than most people realize.
This article will explain how to leverage the 40% commercial solar bonus depreciation in 2025 and show you exactly why waiting until next year could cost your business tens of thousands of dollars in first-year tax savings.
What is Bonus Depreciation?
If you’ve never dealt with bonus depreciation before, the concept is simpler than it sounds. Let’s break it down in plain terms.
Getting Your Tax Savings Sooner
Think of depreciation as spreading out a tax deduction over time. When you buy equipment for your business, the IRS typically makes you deduct the cost gradually over several years. That’s standard depreciation.
Bonus depreciation changes the game. It lets you take a large portion of that long-term deduction all at once, in the very first year. Instead of waiting five years to fully depreciate your solar investment, you can claim 40% of it immediately.
It’s like getting an advance on your tax refund, but one that’s legal and designed by Congress to encourage business investment.
Improved Year-One Cash Flow
For most business owners, cash flow is everything. You can have a profitable business on paper and still struggle if cash isn’t available when you need it.
That’s where bonus depreciation becomes incredibly valuable. By taking a large, immediate deduction in year one, you free up capital that would otherwise go to taxes. That capital can be reinvested anywhere in your business: hiring new employees, purchasing inventory, expanding your marketing, upgrading equipment, or building a stronger cash reserve.
When you combine this with the energy savings from your solar system, you’re not just saving money on taxes. You’re improving your financial position from multiple angles.
The End Result
Solar systems already pay for themselves through energy savings over time. But when you add bonus depreciation to the equation, you recover a large chunk of your investment in the first year through tax savings alone.
This shortens your payback period. Instead of waiting years to see your full return, you see significant returns immediately. The project moves from being a long-term investment to providing immediate financial benefit.
How the Top Solar Incentives Work Together
Here’s where commercial solar gets really interesting from a financial perspective. Bonus depreciation doesn’t work alone. It’s part of a powerful combination of federal incentives that can reduce the net cost of your system.
Step 1: The Investment Tax Credit (ITC)
The foundation of commercial solar incentives is the federal Investment Tax Credit. This gives you a credit equal to 30% of your total system cost. That’s a direct credit that reduces your tax bill dollar for dollar.
But the ITC can actually be even better than 30%. Depending on your project, you may qualify for valuable “adders” that increase the credit:
- If you use domestically manufactured solar equipment, you can add 10%
- If your system is located in an “energy community” (certain areas with fossil fuel employment history), you can add another 10%
These adders can push your ITC to 40% or even 50% of your system cost.
Step 2: Calculating Your “Depreciable Basis”
Here’s an important technical detail that affects your depreciation numbers. You don’t depreciate the full cost of your solar system. Instead, you calculate what’s called your “depreciable basis.”
Your depreciable basis equals your total system cost minus half the value of the ITC you claim.
For example, if you claim the standard 30% ITC, you reduce your basis by 15% (half of 30%). That means your depreciable basis is 85% of your total system cost.
If you claim a 40% ITC with adders, you reduce your basis by 20%, making your depreciable basis 80% of your total system cost.
This rule exists to prevent “double dipping” on incentives, but it’s still favorable to business owners.
Step 3: Applying Bonus Depreciation First, then MACRS
Once you know your depreciable basis, you apply the incentives in order. First, you take your bonus depreciation percentage (40% in 2025) off that basis. Then, whatever remains gets depreciated over the standard five-year MACRS schedule.
So for a 2025 project with an 85% depreciable basis:
- Year 1: You claim 40% of that basis as bonus depreciation
- Years 1-6: You claim the remaining 60% using the accelerated MACRS schedule
This “stacking” of incentives is completely legal and specifically designed into the tax code to encourage renewable energy investment.
Frequently Asked Questions from Business Owners
What does “placed in service” mean for tax purposes?
This is crucial for planning purposes. “Placed in service” doesn’t mean the date you sign a contract or make a deposit. It means the date your system is fully installed, operational, and producing electricity.
For a commercial solar system, that means:
- Installation is complete
- The system is connected to the grid
- All inspections are passed
- The system is actively generating power
This is why you need to start planning now if you want to capture the best rate. A typical commercial solar installation takes 3-6 months from contract signing to completion, sometimes longer depending on system size, permitting requirements, and equipment availability.
Can my business use the ITC “adders” to get a 40% or 50% credit?
Potentially, yes. The two main adders are:
Energy Community Bonus (10%): Available if your system is located in certain designated areas, typically regions with historical fossil fuel extraction or electricity generation. Many areas across the country qualify. An experienced commercial solar provider can tell you whether your location qualifies.
Domestic Content Bonus (10%): Available if your system uses solar panels and other equipment manufactured in the United States. As domestic solar manufacturing expands, this option is becoming more accessible.
These adders can be combined, potentially bringing your ITC to 50%. However, they do have requirements that must be met and documented. Working with a knowledgeable installer who understands these programs is essential.
Can non-profits use bonus depreciation?
No. Depreciation is only available to tax-paying entities because it’s a deduction against taxable income. If your organization doesn’t pay taxes, depreciation doesn’t provide a benefit.
Non-profits are not left out of solar incentives. Starting in 2023, non-profits became eligible for “Direct Pay” of the ITC. This means a qualifying tax-exempt organization can receive the 30% ITC as a direct payment from the Treasury, rather than as a tax credit.
This is a change that makes commercial solar more attractive for non-profits, schools, churches, and other tax-exempt organizations. While you can’t benefit from bonus depreciation, the Direct Pay option still provides substantial value.
How does this interact with state-level tax incentives?
This varies by state. Some states offer additional tax credits, rebates, grants, or accelerated depreciation schedules for commercial solar. Others offer property tax exemptions, ensuring your solar system doesn’t increase your property tax bill despite adding value to your property.
State incentives can stack on top of federal incentives, but the interaction between them can be complex. Some state incentives may be considered taxable income at the federal level. Others may reduce your federal depreciable basis.
This is one area where professional guidance is valuable. A tax professional familiar with renewable energy incentives in your state can help you navigate these rules and optimize your total incentive package.
The Clock Is Ticking – 2026 Is About Timing
Commercial solar will continue to deliver strong financial benefits in any year: lower utility costs, long-term protection against rising rates, increased property value, and enhanced sustainability credentials.
But 2026 has a deadline that directly affects your return on investment:
To secure the full 30% Federal Investment Tax Credit (ITC) and 100% bonus depreciation, your project must begin construction or be safely “safe-harbored” before July 4, 2026.
This is the cutoff recognized in current federal policy for projects to qualify for the most favorable incentive structure.
After that date, incentive structures may change, and your financial outcome may be impacted.
So what does that mean for you now?
It means the decision to move forward in 2026 should be approached strategically, with careful consideration of equipment costs, financing structure, energy savings projections, and other available incentives (which vary by state, utility territory, and project type).
If solar is part of your long-term business strategy — and for many organizations, it should be — the key is maximizing the incentives that are still available and designing your project to produce the strongest cash-flow position possible, and that begins with clarity.
8MSolar’s team specializes in helping commercial building owners, developers, and organizations evaluate their solar return in the current incentive landscape. We’ll model your options, your payback timeline, and the most efficient financing path available in 2026 and beyond.